Thursday, June 30, 2016

New BDCs Added to Q3 2016 Coverage

There are over 50 publicly traded BDCs and historically I have focused on the larger companies with higher trading volumes. However, many of the lesser known BDCs have been outperforming including dividend coverage and growth as well as NAV stability, driving better stock performance. Over the coming weeks, I will be adding many new BDCs to ‘active coverage’ which includes pricing, overall and risk rankings, full projection reports and charts, dividend coverage tiers, interest rate sensitivity, leverage analysis and suggested portfolios. I am still expecting upcoming BDC volatility to drive prices lower, providing better entry points for higher quality BDCs. Also, there are some potential equity offerings. I will likely be purchasing the ones with higher first-lien portfolios, NAV per share stability potential, shareholder friendly fee agreements (see below) and superior dividend coverage. However, these BDCs are usually lower yield and I will also be including some of the higher yield BDCs.

My goal is to prioritize the best potential performers as well as underpriced/overlooked BDCs that are offering higher yields. I will be adding some of these BDCs to the updated Suggested BDC Portfolios report as well as removing BDCs that have been downgraded to ‘Tier 3’ dividend coverage and likely to cut dividends later this year. I will have public articles for some of these companies to increase exposure/awareness and hopefully trading volumes and pricing, but they will mostly discuss basic information such as historical dividend coverage, change in NAV per share and high-level asset mix.  See below for examples.

Currently, I am researching the following items for each company before adding to coverage:
  • Risk (portfolio credit quality and vintage, quality of management, historical credit and NAV performance, effective leverage ratios, portfolio diversification, rate sensitivity, and the need to reach for yield to sustain dividends)
  • Profit (historical and projected dividend coverage, yield compression sustainability, repayment exposure, recurring vs. onetime income, PIK vs. cash, EPS growth/decline, operational cost efficiency)
  • Return (regular/special dividends, risk adjusted, dividend sustainability/growth, NAV stability/growth)
  • Valuation (total return, appropriate yields, NAV and earnings multiples, growth rates)

High Water Mark Fee Structures:

As discussed in many of my articles, The older incentive fee structures can incentivize management to take on increased risk with investors' capital. Management benefits from higher yields with less downside related to future credit issues or the lack of capital losses included when calculating income incentive fees.  This could lead to management taking higher risks (for increased yields) with investors’ capital due to being insulated from potential losses when calculating the income portion of the incentive fees. Ultimately, management could receive higher fees during periods of declining NAV per share, resulting in lower total returns to shareholders.

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