(Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.)
Investors frequently ask me if a BDC might have an equity offering in the near future in the hopes of getting a lower entry price. In a recent article "Ares Capital: Buy On The Dip?" I discussed the dip in price for Ares Capital (ARCC) following the offering. This happened with TCP Capital (TCPC) in late September and New Mountain Finance (NMFC) in October. Keep in mind that when looking at the historical stock charts for each of these also look at the highs and lows during the day, not just the closing prices, because many times the good companies bounce back quickly.
I took a look at the 25 BDCs that I cover and used the results from the 21 that have reported Q3 results to help identify the ones that might be raising equity soon. I only used some simple metrics, at this point, including cash on hand, debt-to-equity ratios, recent portfolio growth, and multiples of net asset value ("NAV"). Investors that are interested in a particular BDC should read the latest transcript, look at historical debt and equity offering patterns (including timing during the quarter), and read the quarterly reports for signs.
The table below ranks each BDC by its debt-to-equity ratio excluding cash. BDCs that are in a growth phase go through rounds debt and equity offerings to grow the portfolio. When they run out of cash and start to get over leveraged they raise equity. However some BDCs have higher price to NAV multiples and may use the opportunity to increase the value to current shareholders by offering equity at higher prices and reducing leverage at the same time. It is also important to look at portfolio growth rates. This is why reading the transcripts of earnings calls is important, because historical growth rates are not the best indicator.
Keep in mind that this information is 45 days old and the companies that are growing have moved up on the list. Obviously ARCC, TCPC, and NMFC have already raised equity in October and Prospect Capital (PSEC) has its at-the-market ("ATM") program and is constantly issuing new shares. American Capital (ACAS) and Solar Capital (SLRC) have low leverage and valuation multiple and are buying back shares. I would not recommend some of the BDCs that should raise capital and reduce the amount of leverage but are priced lower than most BDCs including Full Circle Capital (FULL), Horizon Technology Finance (HRZN), and BlackRock Kelso Capital (BKCC). Depending on the growth plans of TICC Capital (TICC) and Apollo Investment (AINV) they are potential candidates but keep in mind some of these BDCs are still small and need capital to grow. Near the end of the quarter or the beginning of the next is the most likely so they can fully utilize before reporting results.
Investors should only use this information as a starting point for due diligence. See the following for more information:
- List of 25 BDCs and associated focus articles
- Latest BDC Pricing (October 2013)
- Latest BDC Rankings (October 2013)
- The Total Return BDC Portfolio
- BDC Investment Philosophy for general BDC information