BDC Review: Part 4 - 5 Unusual BDCs Offer Investors Some Unique Opportunities

by: Philip Mause

In discussing Business Development Companies(BDCs), there often emerges a model that consists of a BDC that loans money to small and middle sized businesses, holds the debt instruments as its assets and earns interest payments, which constitute its income. Often the BDC has some leverage and earns a spread due to the higher rate of interest it earns on its asset base in comparison with the interest rate it pays on its borrowings.

Many BDCs do not follow this model or, if they do, concentrate their investments in a particular sector of the economy. These BDCs will tend to have different performance characteristics from those of the industry as a whole. Investors should be careful in making comparisons because an "apples and oranges" problem may arise.

After each company, I am including its symbol, Tuesday's closing price, its dividend yield and its price-to-book ratio.

NGP Capital (NGPC) (6.44) (10.8 )(.69) - NGPC has been a favorite of mine especially when I can get it for this big a discount to NAV. It invests almost exclusively in the energy sector and heavily in oil and gas. It recently sold off a big holding so it should be sitting on a lot of cash. This makes the big discount to NAV even more remarkable. NGPC often takes royalty interests in wells or potential wells and so its performance may vary with the performance of the market for oil and the market for natural gas. At this price level, I would strongly recommend it.

Harris & Harris (NASDAQ:TINY) (3.92) (0) (.83) - TINY not surprisingly invests in the nanotechnology area. It tends to have a large percentage of its portfolio in preferred stock or common stock rather than debt instruments. I would not put a huge amount of faith in NAV because equity positions are notoriously difficult to evaluate. On the other hand, it offers an investor an exposure to a new and promising industry.

Medallion Financial (TAXI) (9.73) (7.4%) (1.02) - TAXI, another company with a revealing stock symbol, makes loans to holders of taxicab medallions. For those of you not familiar with the situation, New York City has a taxicab medallion system. You cannot operate a cab without a medallion and medallions are kept at a limited number although there have been additional medallions issued in recent years. The value of these medallions has increased steadily even through the recession so that the collateral behind TAXI's loans is reasonably solid. There is now a substantial vested interest behind the current medallion system and it is very unlikely that it will be changed.

Capital Southwest (NASDAQ:CSWC) (81.75) (1.0) (.58) - CSWC has a long and distinguished history and has appreciated in value slowly but steadily. It tends to hold investments for a very long time (especially by BDC standards). CSWC has a portfolio with a large amount of common and preferred stock. Many of the companies it owns have gone public and thus it is fairly straightforward to calculate the sum of the parts value here. I made this calculation in an article I did earlier this year and even at a considerably higher price I concluded that CSWC was a bargain. It is even cheaper now.

MVC Capital (NYSE:MVC) (10.91) (4.3%) (.62) - MVC is another BDC that holds a large proportion of its portfolio in the common and preferred stocks buckets. These positions are inherently tricky to value and also are prone to fluctuate more in value than debt instruments. This is another BDC trading at a huge discount to NAV.

These BDCs deviate from the archetype for one reason or another. I like NGPC because of the discount but also because it offers exposure to the energy space. I am also a follower of CSWC and I believe that a long-term investor will be well rewarded as CSWC's history suggests. On the other hand, the next few months will be volatile and an individual investor may experience stomach cramps just loging on to his or her account statements.

Disclosure: I am long NGPC, TINY, CSWC.