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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