Total Return BDCs For Q3 2014: Part 3

by: BDC Buzz


This article discusses portfolio growth potential for BDCs without the need to issue additional shares.

I will also identify which BDCs are likely to issue share in the coming quarters based on lower amounts of growth capital.

This is a series of articles that will try to find the best of breed BDCs to update my total return BDC portfolios.

This is a series of articles to find BDCs to include in my updated "Total Return Portfolio" for Q3 2014. Please read "Part 1" for complete description of the portfolio but basically it is for investors that want dependable regular dividends and the potential for special dividends as well as long-term capital appreciation from increased stock values. The other four portfolios that I will cover in following articles are 'High Yield', 'Risk Averse', 'Value' and the 'Underdog' portfolios that will be updated on my "Portfolio Updates" page .

This article will cover portfolio growth potential and which BDCs are most likely to have equity offerings in the coming quarters. Ultimately I will be using this information to see which BDCs are the most likely to increase dividends over the coming quarters. That table below is similar to ones that I have used in other articles to show portfolio growth potential for each BDC as of March 31, 2014 without the need to raise equity capital. However BDCs that issued additional shares since the end of Q1 such as Main Street Capital (NYSE:MAIN) and Prospect Capital (NASDAQ:PSEC) have higher amounts of potential growth than listed in the table. I have placed each BDC into different categories based on the ability to have higher leverage due to SBIC licenses and/or higher quality assets to borrow against. For companies that have the ability to borrow SBA debentures that are excluded from BDC lending requirements I have assumed a preferred debt-to-equity of 0.85 and for the companies with at least 80% or more of investments in safer senior secured debt I have assumed a preferred ratio of 0.80. For the other companies I have used a debt-to-equity ratio of 0.75 including PSEC whose president recently stated "I would say somewhere in the 0.75 range as we talked about in the past and leverage will move a little bit up and down around some type of a band, but we think since we pioneered so many of these longer dated liabilities in the industry, as really the first to open up these possibilities to the industry, whether it's converts or straight bonds or our program notes."

One of the things that stood out in the table above is the higher pricing multiples of net asset value ("NAV") per share for BDCs that have the ability to borrow more using SBIC licenses. This is not a coincidence. Currently, the BDCs that are components in the total return portfolios are MAIN, Ares Capital (NASDAQ:ARCC), Hercules Technology Growth Capital (NASDAQ:HTGC), FS Investment Corp (NYSE:FSIC), New Mountain Finance (NYSE:NMFC), TCP Capital (NASDAQ:TCPC), Gladstone Capital (NASDAQ:GLAD) and PennantPark Investment (NASDAQ:PNNT). Most of these companies have higher growth potential than the other BDCs with the exception of maybe ARCC. The only other BDCs with higher portfolio growth potential without the need to issue additional shares are Fidus Investment (NASDAQ:FDUS) and Triangle Capital (NYSE:TCAP) both of which have been in my previous total return portfolios.

The table below ranks each BDC according to the potential portfolio growth amounts from the previous table along with the dividend yield. BDCs such as PSEC, TICC Capital (NASDAQ:TICC), Fifth Street Finance (NYSE:FSC) and KCAP Financial (NASDAQ:KCAP) already have higher dividend yields without the need to increase and investors should more concerned about dividend sustainability than growth. I have also identified which BDCs are most likely to issues shares based on lower amounts of growth capital but future equity offerings will most likely depend on two things: overall appetite for portfolio growth and current share price to NAV multiples.

The chart below shows the amount of net portfolio growth for each BDC over the last four quarters in an attempt to see which BDCs might have a higher appetite for growth. I have identified the companies from the previous table with lower amounts of growth capital.

At this point I believe PSEC, FSC, THL Credit (NASDAQ:TCRD), Golub Capital BDC (NASDAQ:GBDC) and KCAP Financial are the most likely to issue new shares due to lack of growth capital, current pricing multiples and historical growth amounts. PennantPark Floating Rate Capital (NASDAQ:PFLT) will most likely issue additional shares as the stock price rises above NAV and BDCs such as KCAP could issue share below NAV due to a Special Meeting of Shareholders on July 8, 2014 that "approved the proposal to authorize the Company, with approval of its Board of Directors, to sell shares of its common stock, par value $0.01 per share, at a price below the then current net asset value per share of such common stock."

PSEC will most likely issue shares this quarter but will not do so unless they are accretive to the current shareholders. The current NAV per share is $10.68 and so far there were only four trading days where the price was above as shown in the chart below.


I believe that the BDCs that are currently in the total return portfolios are among the best using this analysis. However NMFC and ARCC had the lowest growth potential compared to the others and FDUS and TCAP are still potential candidates for these portfolios. Also some of the higher yielding BDCs that do not need portfolio growth to deliver higher returns will also be considered including PSEC and FSC but dividend sustainability will be a consideration as well. The rest of this series will continue to look at historical results and projected performance of each BDC to uncover the best BDCs for this portfolio. The key criteria that I will be analyzing are:

  • Dividend growth potential
  • Special dividend potential
  • Relative valuations
  • Risk to reward ratio
  • NAV per share growth historically and projected

I will try to cover each of these areas using available public information as well as my own analysis and I will most likely be investing in all of these BDCs personally. Investors should only use this information as a starting point for due diligence and please see the following for more information:

Disclosure: The author is long ARCC, FSC, FSIC, GBDC, HTGC, MAIN, NMFC, PFLT, PNNT, PSEC, TCPC. 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.