This is Part 5 of a series where I will discuss the changes in risk for the 25 BDCs that I cover compared to the previous quarter including portfolio yields, non-accruals, leverage ratios and portfolio investment mix. In the previous articles I discussed changes in analyst recommendations, earnings projections and price targets, dividend coverage from net investment income ("NII"), changes in net asset value ("NAV") per share, portfolio investment classes, debt to equity ratios, the ability to cover interest payments on borrowing with quarterly NII, and the amount of floating rate investments.
- BDC Risk Profiles For Q2: Part 4 (FDUS, HTGC, SUNS, MCGC, GLAD)
- BDC Risk Profiles For Q2: Part 3 (TCRD, TCPC, MCC, KCAP, SLRC)
- BDC Risk Profiles For Q2: Part 2 (ACAS, PSEC, PNNT, TICC, AINV)
- BDC Risk Profiles For Q2: Part 1 (ARCC, BKCC, FSC, MAIN, TCAP)
- Revised Analyst Price Targets, Projected Earnings And Recommendations
- Rankings For Q2 2013: Part 3 (leverage and floating rate loan levels)
- Rankings For Q2 2013: Part 2 (dividend coverage, NAV changes, and investment classes)
In a recent series of articles "BDC Risk Profiles" I took an in-depth look at the relative risk levels of each BDC. Specifically, I looked at portfolio credit quality, investment asset classes, diversification, non-accrual rates, portfolio yield, fixed/variable rate loans, leverage, interest rate sensitivity, volatility ratios, market capitalization, insider ownership and trends, institutional ownership and trends, and management/operational history for each BDC.
The charts below show the 'relative risk' rankings (10.0 implies the least amount of risk) before and after taking into account the most recent financial results. Full Circle Capital (FULL) has not reported results and the changes in its risk score is due to relative changes compared to other BDCs rather than specific changes in the company.
Golub Capital BDC (GBDC)
GBDC improved its risk profile due to its decreasing average portfolio yields (see chart below) and debt to equity from 0.77 to 0.67, as well as beating projected EPS and covering dividends while growing NAV per share more than most BDCs for the quarter.
In my recent article "Golub Capital: Projections, Risks & Valuation" I projected EPS to beat estimates and discussed my concerns regarding its "one stop" loans that combine the characteristics of traditional first lien senior secured loans and second lien or subordinated loans. This makes it difficult to break out senior loans from the riskier subordinated/mezzanine type loans. These loans generally allow the borrower to make a large lump sum payment of principal at the end of the loan term, and there is a risk of loss if the borrower is unable to pay the lump sum or refinance the amount owed at maturity.
PennantPark Floating Rate Capital (PFLT)
PFLT has been near the top of my risk rankings for a while but its risk score was reduced slightly from the previous quarter due to increased amounts of leverage. It has less than average industry diversification as discussed in "PFLT: The Good, The Bad & The Maybe", the second lowest portfolio yield (SUNS is the lowest), 91% floating rate loans, 91% senior secured loans, and zero non-accruals.
New Mountain Finance (NMFC)
NMFC moved up in the rankings but retained the same risk score due to no significant changes in its portfolio mix, non-accrual loans, or debt to equity ratio. It did have a slight increase to its weighted average portfolio yield but it is still lower than the average and has come down since 2011 as discussed in "BDC Risk Profiles: Part 8 - Credit Quality".
Horizon Technology Finance (HRZN)
HRZN has been near the bottom of my risk rankings for a few reasons including having the highest debt to equity ratio of the 25 BDCs that I follow as discussed in "Rankings For Q2 2013: Part 3", the worst interest expense coverage from NII, higher than average portfolio yield of 14.5% up from 12.8% in the previous quarter (see chart below), declining NAV per share over the last two years, lower industry diversification by design and targets companies that conduct business in regulated industries that could be affected by changes in government regulations as discussed in "The Good, The Bad And The Maybe? Part 15: HRZN", a small market cap, no skin in the game from management with both the CEO and President owning less than $100,000 in personal holdings and much lower than any other BDC, low institutional ownership and currently selling, and three investments on non-accrual.
Investors should only use this information as a starting point for due diligence. See the following for more information: