BDC Review: Part 1 - The Newbies

by: Philip Mause

In recent months, Business Development Company (BDC) stocks have once again gotten clobbered. It is true that they are financial stocks and would certainly face some challenges in a deep recession. But most of them are well below their very modest leverage limits and, to the extent they are trading substantially below book value, are already pricing in substantial write offs and write downs.

Some of the new BDCs may present some interesting opportunities. Many of them are trading well below the prices at which the new offerings were made a few short months ago. For this kind of a company, this pricing may offer an attractive opportunity.

The new BDCs really haven't had the opportunity to get into a lot of trouble yet and a good case can be made that at least some of them are oversold. For each company, I will provide the symbol, Friday's closing price, the current dividend yield and the price to book ratio.

  1. Horizon Technology (NASDAQ:HRZN): (15.59), (10.3%), (.88)
  2. Solar Capital (NASDAQ:SLRC): (21.98), (10.9%), (.93)
  3. Golub Capital(NASDAQ:GBDC): (14.85), (8.6%), (1.01)
  4. Full Circle Capital (FULL): (6.98), (12.9%), (.78)
  5. PennantPark Floating Rate (NASDAQ:PFLT): (11.89), (7.1%), (.83)
  6. Solar Senior Capital (NASDAQ:SUNS): (15.45), (6.2%), (.83)

I do not have the space to go into detail on each of these but I will circle back with more detail on recommendations in a later piece in this series. In general, these companies have extremely low or no leverage and in some cases are still deploying capital.

  • HRZN focuses on secured loans to development stage companies in the tech and life sciences sector. It sometimes takes warrants and thus can prosper if the company it lends to is very successful.
  • SLRC has almost no leverage; despite its name, it has no special connection with or commitment to the solar energy sector.
  • GBDC has had some significant insider buying recently and has leverage below 50%.
  • FULL is on the smallish size (roughly $90 million in assets which sometimes leads to a bigger discount from book value perhaps because it means that it will be harder for the BDC to diversify its holdings and admin expenses may be high on a percentage basis.
  • FULL pays a monthly dividend which some investors find attractive. Its portfolio was taken over from another company rather than being the result of a series of loans it has made itself.
  • PFLT came out in April at 15 and is well of that price. It has made and well make floating rate loans in the middle market space. It reserves the right to invest up to 35% of its portfolio in distressed debt, equity or other riskier assets. At this point its portfolio is heavily concentrated (roughly 80%) in secured first lien loans. As of its last financial report it had no net debt.
  • SUNS came out in February at 20 and is trading well off that price. It invests in senior loans in private leveraged middle market companies. As of its last financials, there is no net debt. There has recently been some insider buying.

I think that SUNS and PFLT are reasonably safe ways to buy a portfolio of reasonably secure loans at a discount.

HRZN should be able to take advantage of its position in the Tech and Life Science spaces to generate an attractive return. FULL holds a legacy portfolio and if that portfolio is really worth its current book value, FULL stock is a bargain here.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.