Friday, January 9, 2015

BDC Buzz Report: January 2015

The following was sent out to my newsletter subscribers last week. 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
  • Positive Industry Signs
  • Historical NAV Multiples & Dividend Yields
  • Oil/Energy Exposure Issues

BDC Market Update

BDCs have had a tough year and are trading at depressed multiples for many reasons starting with declining portfolio yields and dividend sustainability issues, followed by selling institutional shareholders due to being removed from the S&P and Russell indices.  Over the last three months there have been increasing concerns about energy related exposure in certain portfolios and then there may have been tax-loss selling due to depressed prices.

Positive Industry Signs

I believe that some investors have been selling baskets of investments, including higher quality BDCs, that has created an opportunity for investors. In 2015, I believe BDCs could outperform for the following reasons, many of which are supported by recent statements from BDC management and later this month I will have series discussing each of the following:
  • 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
  • Potentially widening spreads
  • 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)

Historical NAV Multiples & Dividend Yields

The following charts shows the average price-to-NAV multiples and dividend yields over the last four years. Historically BDCs have traded around book value or 99% of NAV.  Currently BDCs are averaging a 5% discount to NAV

Along with NAV per share, many investors use expected dividend yield as a gauge of value for investing in BDCs that is often based on investors’ perception of dividend coverage and/or capital preservation.  Over the last four years BDC have average around 10.0% regular dividend yield but due to depressed pricing multiples, the average is currently closer to 10.8%.  I believe this will become a large incentive for investors in 2015 that are seeking to beat S&P 500 returns.  Again I will cover this in another series along with some of the positive trends that BDC investors can look for this coming year.

Investors should be ready to buy BDCs that fit their investment profile.  

Oil/Energy Exposure Issues

It has become obvious that low oil prices are going to be a topic of discussion for BDCs with larger amounts of oil/energy related exposure.  This includes portfolio companies and other investments such as CLOs.  I do not consider BDCs as an investment only in the financial sector and one of the reasons that I prefer them to other higher yield investments is because they invest in multiple industries.  Currently the average BDC has around 6% to 7% of the portfolio invested in oil and energy related companies but this ranges from none to almost 20% for certain BDCs.

As a part of my ‘Top 10 BDC Issues for 2015’ series I will be covering oil and energy related issues but only at a high level and will not be discussing individual company detail. One issue that I will cover is exposure related to CLO investments for PSEC, TICC and KCAP.  

Last quarter, oil prices were not as much of an issue because crude was still in the $90 range as of September 30, 2014.  By the end of calendar Q4 2014 it was closer to $54 and could impact asset values and ultimately NAV for some BDCs.  


Assessing oil related exposure for BDCs is a very complicated task and involves making educated guesses.  The following are just some of the indicators I will be looking for:
  • Industry: oil upstream (most at risk), downstream, midstream, natural gas, other energy, other services or products to oil/energy industries
  • Class of investments: first lien, second lien, subordinated or structured products (CLOs)
  • Protective covenants
  • Interest rate
  • Portfolio leverage: debt-to-EBITDA

Not all oil related companies have the same amount of exposure to commodity prices.  Midstream and downstream investments are less influenced by the price of oil compared to upstream assets that are usually the most at risk.  Drillers and E&P companies are usually impacted by commodity price declines the hardest, especially 2nd lien positions.  This is an overly generalized view of the industry.

I have already put together a preliminary ranking of oil exposure by BDC and will be expanding for each company but this information is only available in my offline reports as discussed in "Premium Reports".

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”.
  •  $60 for all reports through 3/31/15.
  •  $95 for all reports through 6/30/15.
  •  $165 for all reports through 12/31/15.