Wednesday, April 1, 2015

BDC Buzz Report: April 2014

As I have mentioned in previous newsletters, I will not be writing articles on Seeking Alpha as frequently as in the past so that I can focus on Premium Reports.

Included in this report:
  • BDC Market Update
  • Current BDC Multiples of NAV and NII
  • Actual Total Returns by BDC

BDC Market Update

As discussed in many articles including “Top 10 BDC Issues For 2015” and “High-Yield BDCs Hit New Lows”, I believe BDCs could outperform the S&P 500 in 2015 for the following reasons:
  •  Continued outflows from leveraged funds resulting in more favorable loan pricing
  • Less early loan repayments and refinancing at lower rates
  • Continued bank regulations leading them to larger borrowers and reduced Level 3 assets
  • Investors looking for returns that will beat the S&P 500 (likely to be ~5% for 2015)
  • Low NAV multiples that could be corrected
  • Overreaction to potential energy related issues (for certain BDCs)  

Current BDC Multiples

I use core net investment income ("NII") that can be different from reported EPS for some BDCs because it excludes both income and incentive fees related to capital gains as well as some of the major onetime expenses, including fees related to amending debt facilities. I also do not include excise tax expense.

Actual Total Returns – Last 15 Months

Explanation of total returns: The ‘Change in Stock Price’ assumes you purchased the stock at the beginning of the year and sold as of March 31, 2015. Dividends do not assume reinvestment and are calculated using the amounts paid divided by the purchase price at the beginning of 2014.

Please visit ‘Premium Reports’ if you are interested in more information on BDCs including:
  • Rankings (risk, return, pricing, dividend potential)
  • Individual BDC Projections
  • Pricing and Valuation
  • Dividend Coverage Potential
  • Suggest BDC Portfolios
  • My Current Positions

Friday, January 9, 2015

BDC Buzz Report: January 2015

The following was sent out to my newsletter subscribers. If you have signed up but did not receive please check your spam/junk folder settings. 

FYI – I have decided to make this newsletter a monthly publication that will include more detail in the following months.

Included in this report:
  • BDC Market Update
  • Example: FSC Dividend & Fee Income Analysis
  • BDC Earnings Announcements & MCC: Items to Watch

BDC Market Update

As discussed in many recent articles, 2014 was a tough year for BDCs due to them being removed from the S&P and Russell indices, continued interest rate fears, general declines in small caps, selling institutional shareholders over the last two quarters and December tax-loss sellers. More recently, investors have been concerned with oil and energy exposure among portfolio investments. BDCs have started to rebound and are up an average of 5% since mid-December.

FSC Dividend & Fee Income Analysis

The following analysis is for dividend and fee income comparison only – these are not my projections.

After each company reports results I use a similar analysis to assess dividend coverage going forward. Key items to watch are stated and effective portfolio yields, fee and dividend income potential and operation cost efficiencies. Other important items are related to portfolio credit quality.  Many BDCs are reliant on non-interest income to cover dividends that can cause swing in quarterly EPS/NII and dividend coverage.  The following is an example using Fifth Street Finance (FSC) that recently increased its dividend and relies on dividend and fee income to support 20% of its dividend payment.

The following are the analyst estimates for the next two quarters.

Earnings Announcements: Items to Watch

So far only six BDCs that I follow have reported results including AINV, GLAD, GBDC, PFLT, PNNT and PSEC. This week FSC, MCC and FULL will be reporting and investors should pay close attention to dividend coverage potential and portfolio credit quality indicators, especially for MCC.  As discussed in “Medley Capital Update For FQ4 2014”, the company recently reported a large decline in its portfolio yield and was only able to cover dividends due to strong fee income. This could be a problem going forward depending on a few things including increased non-accruals and lower amounts of non-interest related income such as fees and dividends. Please see the FSC example below.

I have already weighed in on the Prospect Capital (PSEC) dividend coverage potential in my “PSEC: Dividend Coverage Stress Test” and if you would like to receive similar analyses for the remaining BDCs please visit “Premium Reports”. For most companies I try to turnaround the new information before markets open the next day with my personal recommendations. Currently there are around 40 reports including dividend coverage, oil and energy exposure, interest rate sensitivity, my current positions and allocations, overall rankings and pricing, suggested portfolios, etc.

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Wednesday, December 17, 2014

BDC Surveys


I will be using this page to host upcoming links to surveys as well as the results:

Each survey will provide a link after completion showing the results so far, but please bookmark to check back in after all results are recorded.

Current Surveys:

Monday, December 15, 2014

BDC Buzz Report: 14 December 2014

BDC Market Update

This year has been difficult for BDCs due to being removed from the S&P and Russell indices, continued interest rate fears, general declines in small caps, selling institutional shareholders over the last two quarters and December tax-loss sellers.  I believe that some investors have been selling baskets of investments, including higher quality BDCs, which has created an opportunity for investors. At some point, BDCs will rebound and I will have a series of articles coming out that discusses many of the positive signs that we are seeing including lower borrowing costs, stabilizing or even increasing portfolio yields and less competition from banks as they continue to exit level 3 assets.

Over the next two to three weeks, BDCs will either continue to fall, have a ‘dead cat bounce’ or potentially have a sustained rally into 2015. Investors should be ready for all three of these scenarios and to buy preferred BDCs over the coming weeks. As shown in the previous chart, I believe investors are currently reacting out of fear (in both the general and BDC markets).  The following chart shows the VIX hitting a high in mid-October at the same time BDCs hit a low for the year and there are signs that the VIX is headed to these levels yet again. Volatility – or “market whiplash” – is clearly back in the market.

The CNN Money Fear & Greed Index:

Investors are driven by two emotions: fear and greed. Too much fear can sink stocks well below where they should be. When investors get greedy, they can bid up stock prices way too far.

“We look at 7 indicators:  For each indicator, we look at how far they've veered from their average relative to how far they normally veer. We look at each on a scale from 0 - 100. The higher the reading, the greedier investors are being, and 50 is neutral.”

Source: CNN Money

What should investors do over the next few weeks?

Investors should be ready to buy BDCs that fit their investment profile.  Recently I have noticed that pricing multiples have changed to reflect investors’ perceptions of dividend coverage and risk or capital preservation.  BDCs that continue to trade at lower NAV per share multiples will be capital constrained and could risk losing various credit ratings that could contribute to a higher cost of capital.

There will likely be continued basket and tax-loss selling but at some point I believe BDCs will rebound sharply as they did after the October 15th lows. Also I believe investors will continue to pay higher multiples for higher quality BDCs giving them a clear advantage going into 2015.

Premium Reports:

There are currently over 35 reports available as discussed in “Premium Reports”.
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