This article looks at Solar Capital (SLRC) and compares it with the other BDCs covered in my previous articles including:
- Part 1 - Medley Capital Corporation (MCC), MCG Capital Corporation (MCGC) and Fifth Street Finance Corp. (FSC).
- Part 2 - Prospect Capital Corporation (PSEC), BlackRock Kelso Capital (BKCC) and Main Street Capital (MAIN)
- Part 3 - Apollo Investment Corp. (AINV)
- Part 4 - PennantPark Investment Corporation (PNNT)
Medley Capital Corporation - on February 12, held its annual meeting but adjourned until March 7, in order to provide additional time to solicit proxies to authorize the sale of shares at a price below current net asset value.
BlackRock Kelso Capital - on February 14, announced that it will report earnings for the fourth quarter and full year 2012 on Thursday, March 7, prior to the opening of the financial markets.
Business Development Companies (BDCs) lend to small and mid-sized businesses, with limited financial leverage, paying out most of their income to investors and pay little to no corporate tax.
These are the five general criteria I use to evaluate BDCs:
- Profitability (EPS to cover dividends, growth)
- Risk (diversification, volatility, leverage)
- Payout (sustainable, consistent, growing)
- Analyst Opinions
- Valuation (P/E, PEG, NAV)
For more information about BDCs, how I evaluate them, and my BDC investment philosophy, please see this article.
Below is an oversimplified chart evaluating the companies I have reviewed among my universe of 30 BDCs giving them a relative score between 0 and 10 (10 being the best). In reality I use different weightings for each criterion. In future articles I will add the new companies to this chart as well as update info.
- Market Cap: $1.16 billion
- Yield: 9.4%
- Div/EPS: 100%
- Div/Proj. EPS: 102%
- P/E: 11.9
- Price/NAV: 1.12
- Debt/Equity: 0.22*
- Portfolio Yield: 13.9%
* debt/equity ratio is adjusted for the most recent stock and debt offerings but not the Crystal Financial acquisition
- November 16 - completed offering of $100 million in 30-year senior unsecured notes @ 6.75%
- December 28 - acquired Crystal Capital Financial Holdings LLC ("Crystal Financial")
- January 11 - completed offering of 6 million shares @ $24.40 for gross proceeds $146.4 million (plus another 900,000 shares at underwriters option)
In the third quarter, SLRC generated net investment income of $0.60 per share, continuing its positive earnings momentum and covering its quarterly dividend payment. Since the end of Q1, the net investment portfolio has grown approximately 16%. It will release year-end financial results on February 25,` with projected EPS for Q4 2012 of $0.59 and dividends of $0.60. Since last quarter's earnings release they have raised over $250 million in debt and equity, and purchased Crystal Financial, which added 23 loans at a par value of approximately $400 million and a $275 million revolving credit facility. It expects the acquisition will be immediately accretive to net investment income and generate a cash yield consistent with other assets in the portfolio. The current management team of Crystal Financial will be retained as part of the transaction and operate independently to help further grow the combined portfolio.
Currently from a profit standpoint SLRC is breakeven at best once it pays dividends, similar to BKCC and FSC. But with the recent increases in growth capital, available liquidity, and the addition of Crystal Financial and the management team, the possibility for portfolio growth and increased originations is high.
As of September 30, it had investments in 41 portfolio companies and 23 industries, totaling $1.17 billion at fair value invested 41% in senior secured loans, 42% in subordinated debt and 17% in preferred and common equity, with a weighted average yield of approximately 13.9%. Over 98% of the income-producing assets were performing and it expects the two small non-accrual positions (Direct Buy and Granite Global) to come up non-accrual status in the fourth quarter. The portfolio is less diversified than the average BDC with over 70% in consumer discretionary/staples and financials, with very little in energy, basic materials, and technology similar to PSECs portfolio. The acquisition of Crystal Financial should have a few positive impacts including increased industry diversification and weighting more of the portfolio toward asset-based and other secured financing.
SLRC has relatively low volatility ratios and one of the lowest leverage ratios in the industry with debt/equity of 0.22 after taking into account the recent debt and equity offerings but before the acquisition. Only American Capital (ACAS), TCP Capital (TCPC), and THL Credit (TCRD) are lower between 0.10 and 0.15.
In a recent statement from the company: "We believe our relatively low level of leverage provides us with a competitive advantage, allowing us to anticipate providing a consistent dividend to our investors, as proceeds from our investments are available for reinvestment as opposed to being consumed by debt repayment. We may increase our relative level of debt in the future. However, we have increased our outstanding debt to approximately $489 million as of December 31, 2012, primarily in connection with the Crystal Acquisition and as a result of the issuance of the 2042 Notes."
The management team's significant 6% ownership of SLRC helps to align their interests with shareholders.
Currently SLRC pays 9.4% annually in dividends, which is just above the group average. It has not increased dividends since Q2 2010 and probably won't until EPS can support hopefully later this year.
Analysts have an average to higher rating of SLRC with a target price of around $25.
The stock is currently trading at 12% over NAV and a P/E of 11.9, both of which are near the average for the group.
With management's commitment to covering the dividend and continued portfolio growth with a limited amount of leverage, I would put SLRC at the top end of the 'Maybe' category with MAIN, AINV and FSC. At least until it reports financial results on February 25, and we get a clearer picture of the new balance sheet and portfolio, as well as some insight from the earnings call the following day.