Thursday, April 14, 2016

Earnings Season for BDCs: Which BDCs Will Outperform in Q1 2016?

Included in this update:
  • Quick BDC Market Update
  • Q4 2015 NAV Changes vs. Stock Price Performance
  • BDC Reporting Dates
  • Updates on Q1 2016 Results
  • What can we expect for the BDC sector for the rest of 2016?
  • Current Dividend Yields and Multiples of NAV

Quick Update:

BDCs continue to rally and are up another 6% on average since my last newsletter and easily outperforming the S&P 500 and high-yield bonds (before including dividends) as shown in the chart below. I am still expecting a pullback but happy to see a continued rally as BDCs have been underperforming the general markets since 2014.

I have also indicated when BDCs began to report Q4 2015 results which is also when they began to outperform compared to other high-yield investments and the general market. There are many potential reasons for this as discussed in my previous updates and articles. However, not all BDCs have participated equally in this rally and I am expecting a wide range of operating results in the coming weeks that will likely cause increased bifurcation in multiples and price performance.

Q4 2015 NAV Changes vs. Stock Price Performance:

There has been a wide range of performance for BDCs in 2016. The following chart/table shows the recent stock price performance for HTGC, MAIN, FSC and MCC compared to the average BDC and S&P 500. Clearly investors are paying multiples based on operating results and credit quality as MCC and FSC have continuously had credit related within their portfolios. I am expecting various other BDCs to have similar issues in 2016 and investors need to closely watch the upcoming results for signs of changes in portfolio credit quality beyond NAV per share including the restructuring of investments, individual writedowns, management discussions on calls and footnotes, etc.

BDC Reporting Dates:

BDCs will begin reporting Q1 2016 in two weeks.

Real-Time Updates on Q1 2016 Results:

When investing in BDCs, timing is everything and for investors that would like to receive active updates as BDCs begin to report, please visit ‘BDC Reports’ that also includes all reports from the previous quarter including:

  • Individual BDC Projections & Dividend Sustainability
  • Rankings (risk, return, pricing, dividend potential)
  • Pricing Charts & Valuation
  • Interest Rate Sensitivity Comparisons
  • Suggested BDC Portfolios
  • Announcements of Upcoming Purchases & My Current Positions

What can we expect for the BDC sector for the rest of 2016?

  • Potential (or continued) portfolio credit deterioration for poorly managed companies
  • Continued and increased bifurcation driving a wide range of performances
  • Investors realizing that passive income from investments will be more difficult than historically
  • Market overreaction to general market changes including interest rates and credit cycle/economic concerns
  • Lower competition from banks due to increased regulations

Current Dividend Yields and Multiples of NAV per Share: