This article focuses on TICC Capital (TICC) and compares it to the 17 BDCs covered in my previous articles. Please visit bdcbuzz.blogspot.com for updated info or see the list of previous BDCs covered at the end.
- March 9 - various analysts recently upgraded Fifth Street Finance (FSC) so I adjusted the analysts category higher.
Business Development Companies (BDCS) lend to small and mid-sized businesses, with limited financial leverage, paying out most of their income to investors and paying 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 table evaluating the companies I have reviewed among a universe of 30 BDCs giving them a relative score between 0 and 10 (10 being the best). In reality I use different weightings for almost 100 data points on each company and my personal rankings (based on my risk/return comfort) are close to these but far from exact. In future articles I will add the new companies to this table as well as update info.
- Market Cap: $511 million
- Div Yield: 10.8%
- Div/EPS: 116%
- P/E: 9.5
- Price/NAV: 1.08
- Debt/Equity: 0.80
- February 6 - announced that it has completed a public offering of 6,325,000 shares of its common stock (including 825,000 shares of common stock that were issued pursuant to the full exercise of the option granted to the underwriters to purchase additional shares) at a public offering price of $10.36 per share for total gross proceeds of approximately $66 million.
- March 12 - reported results and missed EPS estimates.
TICC is another BDC constantly raising cash through equity offerings (see chart below) and has grown its annual net investment income by 23%, from $30 million in 2011 to $37 million in 2012.
Due to the continued dilution of shares, projected quarterly earnings are not expected to cover the currently $0.29 dividend until Q2 2013 and potentially decline during 2014 (see chart below).
TICC has a less than average industry diversification and historically overweight in technology-related companies with very few investments in financials, energy, industrials, and basic materials (see chart below). As of September 30, 2012, it had investments in debt securities of 78 portfolio companies, with a fair value of approximately $448 million, and equity investments in 24 portfolio companies, with a fair value of approximately $90 million.
During the past several quarters, TICC has acquired a number of debt and equity positions in collateralized loan obligation ("CLO") investment vehicles accounting for 32% of total investments at fair value. These investments are sometimes bought in the secondary market at substantial discounts to their par values, which provide an attractive risk-adjusted return but might be riskier and less transparent than direct investments in portfolio companies. Generally, there is less information available regarding the underlying debt investments held by CLOs than if they had invested directly in the underlying companies. These investments are also subject to the risk of leverage associated with the debt issued by CLOs and the repayment priority of debt holders senior to TICC in the CLO. These investments are thinly traded, not listed on traditional exchanges, and subject to irregular trading activity making them less liquid, difficult to value and more volatile. The CLO vehicles TICC invests in are typically highly levered (10-14 times), and therefore, subject to a higher degree of risk of total loss.
Other BDCs that invest in CLO type vehicles as discussed in previous articles are KCAP Financial (KCAP) with 24% of its portfolio, American Capital (ACAS) at 4%, Prospect Capital (PSEC) at 14% and Ares Capital (ARCC) which has recently reduced its exposure to 1%.
TICC has a debt to equity ratio of 0.80 which is higher than average.
Dividends have increased steadily over the last three years and the current yield of 10.8% is well above the average. Due to the recent equity offerings the projected net investment income per share will like grow at a slower pace potentially delaying further dividend increases.
Most analysts consider TICC a "Hold" with an average target price between $9 and $11.
Currently TICC is trading 8% over NAV and a P/E of 9.5 which are both below average.
The dividend yield and relative valuation multiples of TICC are attractive but given the increased risk profile because of its CLO investments, leverage ratios, and lack of industry diversification put TICC Capital at the lower end of "The Maybe" group of BDCs along with Golub Capital (GBDC) and Apollo Investment (AINV).
- Part 13 - TCP Capital (TCPC)
- Part 12 - Triangle Capital (TCAP)
- Part 11 - New Mountain Finance (NMFC)
- Part 10 - THL Credit (TCRD)
- Part 9 - Golub Capital (GBDC)
- Part 8 - KCAP Financial (KCAP)
- Part 7 - Ares Capital (ARCC)
- Part 6 - Hercules Technology Growth Capital (HTGC)
- Part 5 - Solar Capital (SLRC)
- Part 4 - PennantPark Investment (PNNT)
- Part 3 - Apollo Investment (AINV)
- Part 2 - Prospect Capital (PSEC), BlackRock Kelso Capital (BKCC) and Main Street Capital (MAIN)
- Part 1 - Medley Capital (MCC), MCG Capital (MCGC) and Fifth Street Finance (FSC).