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.

  • $65 for all reports through 6/30/15
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  • $145 for all reports through 12/31/15
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