This is a series of articles that discusses dividend coverage for most of the 26 BDCs that I cover in an effort to uncover companies that have the potential to sustain or increase current dividends. I will also be using this information to update my latest "BDC Rankings: May 2014". For more details regarding this series and for the dividend coverage results for Fidus Investment (NASDAQ:FDUS), PennantPark Floating Rate Capital (NASDAQ:PFLT), Gladstone Capital (NASDAQ:GLAD), Golub Capital BDC (NASDAQ:GBDC), PennantPark Investment (NASDAQ:PNNT), Hercules Technology Growth Capital (NASDAQ:HTGC), FS Investment Corp (NYSE:FSIC), Ares Capital (NASDAQ:ARCC), TCP Capital (NASDAQ:TCPC), THL Credit (NASDAQ:TCRD), New Mountain Finance (NYSE:NMFC) and Medley Capital (NYSE:MCC) please see:
- Part 1: Ares Capital
- Part 2: Medley Capital
- Part 3: TCP Capital
- Part 4: THL Credit
- Part 5: New Mountain Finance
- Part 6: FS Investment Corp.
- Part 7: Hercules Technology Growth Capital
- Part 8: PennantPark Investment
- Part 9: Golub Capital BDC
- Part 10: Gladstone Capital
- Part 11: PennantPark Floating Rate Capital
- Part 12: Fidus Investment
Over the last two years Triangle Capital (NYSE:TCAP) has had a declining portfolio yield from 14.0% to 12.4% but still above the average BDC at around 11.5%. This declining portfolio yield is due to higher amounts of loan prepayments as predicted in my "Triangle Capital Articles".
A large amount of TCAP's borrowings are SBA debentures at fixed long-term rates and excluded from BDC debt-to-equity requirements. On the last call the CFO mentioned "Turning briefly to liquidity and capital resources from a liquidity standpoint as of March 31, we had approximately $91 million in cash on hand, $31 million of undrawn SBA debentures, and $154 million available under our senior credit facility. Our liquidity totals approximately $275 million, which equates to approximately 40% of the value of our investment portfolio. As a result, we are pleased with our liquidity position especially taking into account the conservative composition of our balance sheet."
As an internally managed BDC, TCAP has a lower cost structure than most BDCs. The following chart is from TCAP's investor presentation showing the distribution of revenues from 2010 to 2013 and internally managed BDCs with lower operating expenses.
The following table shows the most recent quarter financial results along with projections at various levels of leverage assuming that TCAP uses at least $50 million of its available cash along with a stable portfolio yield of 12.4% to determine the impacts on dividend coverage. Each of these scenarios assumes a full quarter of benefit from interest income but also a full quarter of interest and operating expenses.
These scenarios assume the highest level of efficiency and actual results could be lower because there will always be some turnover in the portfolio (that could drive higher fee income). This analysis implies that TCAP needs to use some its available cash as well as higher amounts of leverage to cover dividends in the future. If its portfolio yield continues to decline TCAP will most likely use its SBIC borrowing capacity to increase returns.
Side by Side Comparison:
The goal of using a side by side comparison is to show an 'apples to apples' view of each BDC with a stable portfolio yield, current cost structure and capital expenses with a portfolio that uses the same amount of leverage to increase return on equity investments. I will be using the amount of equity as of March 31, 2014 (or most recent) along with a debt-to-equity ratio of 0.80 and the current portfolio yield to project income and expenses, tracking the following metrics:
- Dividend coverage (using a debt-to-equity 0.80)
- BDC expenses (as a % of available income)
'Available income' is total interest and fee income less interest expense from borrowings and is the amount of income that is available to pay management expenses and shareholder distributions. BDCs with lower expenses can pay higher amounts to shareholders without investing in riskier assets.
The following table compares the results for TCAP to the other BDCs (so far in this series). As you can see TCAP and HTGC (the two internally managed BDCs) have much lower than average 'operating cost as a percentage of available income'. At this point I believe TCPC, HTGC and FSIC have a much higher potential for dividend increases than the average BDC. I will continue to add more companies in the following articles.
Disclosure: The author is long ARCC, MAIN, FSIC, HTGC, TCPC, NMFC. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.