The majority of the companies in the sector of Business Development Companies - or BDCs - have fiscal years that ended in December. Many of those companies will not be reporting their Q4-15 numbers until March. Four companies that have fiscal years that do not end in December reported this week. All four reported less than pleasant news when it comes to net investment income (or NII). Three of the four reported bad news about their changes in net asset value (or NAV).
This update will start with the year-to-date and price-to-earnings spreadsheets for the full sector, and end with spreadsheets on the earnings metrics for the three BDCs that reported this week. Golub Capital reported its numbers after the market's close on Friday. I expect to cover its numbers in a separate article. Golub had a NII shortfall from its projections and a rare NAV gain.
Yield in the spreadsheet below is based on the Q4-15 'regular' dividend. Spreadsheet header abbreviations: Div = dividend; EPS = earnings per share; LTM = last twelve months; and YTD = year to date. The dividend-to-EPS ratio is a measure of dividend safety. Due to calendar and fiscal years failing to overlap, I also include a dividend to the sum of the last four quarters of NII - in the Div/NII LTM column. The last four columns measure the percentage change in the 2015 EPS projection; the change in the price target since the beginning of the year; the change in the Q4-15 dividend from the Q4-14 dividend; and the change in NAV between Q2-15 and Q2-14. Special dividends are not included in this data. ARCC, CPTA, FDUS, FSIC, MAIN and TCPC have paid special dividends on a near regular schedule. KCAP will reduce its Q1-16 dividend to $0.15 - I have encoded this change as happening in Q4-15 so it will be reflected in the stats right now.
|Share Price||Q3-15||Price||YTD Percent Change||LTM||LTM|
|Alcentra Capital Corporation||(NASDAQ:ABDC)||11.60||10.01||13.59||14.92||0.67||-13.71||-12.83||0.00||-1.64||0.00||-0.53|
|American Capital Senior Floating||(NASDAQ:ACSF)||9.83||8.66||13.39||13.53||0.64||-11.90||-8.95||0.00||0.00||3.57||-8.89|
|Apollo Investment Corporation||(NASDAQ:AINV)||5.22||5.12||15.63||7.83||0.65||-1.92||1.92||0.00||-2.68||0.00||-10.21|
|Ares Capital Corporation||(NASDAQ:ARCC)||14.25||13.60||11.18||16.79||0.81||-4.56||-4.56||0.00||-2.16||0.00||0.48|
|BlackRock Kelso Capital||(NASDAQ:BKCC)||9.40||8.70||9.66||10.66||0.82||-7.45||-5.21||-0.99||-1.22||0.00||6.92|
|CM Finance Inc.||(NASDAQ:CMFN)||10.02||9.17||15.14||13.65||0.67||-8.48||-5.02||0.00||0.00||2.66||-6.83|
|Capitala Finance Corp.||(NASDAQ:CPTA)||12.08||11.02||17.06||18.04||0.61||-8.77||-8.77||0.00||-2.31||0.00||-9.30|
|Fidus Investment Corporation||(NASDAQ:FDUS)||13.69||13.18||11.84||15.12||0.87||-3.73||-3.73||-0.60||-4.35||2.63||-0.40|
|Fifth Street Finance Corp.||(NYSE:FSC)||6.38||5.86||12.29||9.00||0.65||-8.15||-8.15||-2.60||-2.98||-27.97||-6.64|
|Fifth Street Senior Floating Rate||(NASDAQ:FSFR)||8.57||7.48||12.03||12.11||0.62||-12.72||-12.72||-2.02||-4.41||-25.00||-4.27|
|Franklin Square Investment Corp.||(NYSE:FSIC)||8.99||8.28||10.77||9.64||0.86||-7.90||-7.15||0.00||-2.07||0.00||-5.40|
|Full Circle Capital Corporation||(FULL)||2.47||2.38||17.65||4.00||0.59||-3.64||-3.64||0.00||0.00||-47.50||-35.90|
|Gladstone Investment Corporation||(NASDAQ:GAIN)||7.67||6.87||10.92||9.05||0.76||-10.43||-10.43||0.00||0.00||25.00||6.60|
|Garrison Capital Inc.||(NASDAQ:GARS)||12.17||11.14||12.57||14.92||0.75||-8.46||-8.46||0.00||-1.09||0.00||-4.30|
|Golub Capital BDC, Inc.||(NASDAQ:GBDC)||16.63||15.39||8.32||15.80||0.97||-7.46||-7.46||-1.50||-1.68||0.00||1.61|
|Gladstone Capital Corporation||(NASDAQ:GLAD)||7.31||6.06||13.86||9.06||0.67||-17.10||-17.10||0.00||0.00||0.00||-4.73|
|Goldman Sachs BDC||(NYSE:GSBD)||19.00||18.17||9.91||19.46||0.93||-4.37||-4.37||0.97||-4.47||0.00||-2.46|
|Harvest Capital Credit||(NASDAQ:HCAP)||11.73||10.02||13.47||14.27||0.70||-14.58||-11.70||0.00||0.00||0.00||-1.65|
|Share Price||Q3-15||Price||YTD Percent Change||LTM||LTM|
|Horizon Technology Finance Corp.||(NASDAQ:HRZN)||11.73||9.79||14.10||13.94||0.70||-16.54||-16.54||-0.70||0.00||0.00||-3.06|
|Hercules Technology Growth Capital||(NASDAQ:HTGC)||12.19||10.79||11.49||10.02||1.08||-11.48||-11.48||-2.29||-4.36||0.00||-1.96|
|KCAP Financial, Inc.||(NASDAQ:KCAP)||4.07||3.15||26.67||6.33||0.50||-22.60||-22.60||0.00||0.00||-16.00||-17.47|
|Main Street Capital Corporation||(NYSE:MAIN)||29.08||27.98||7.72||21.79||1.28||-3.78||-3.78||-0.43||-5.74||5.88||3.37|
|Medley Capital Corporation||(NYSE:MCC)||7.52||6.63||18.10||11.00||0.60||-11.84||-11.84||0.81||-5.46||-18.92||-11.50|
|Monroe Capital Corporation||(NASDAQ:MRCC)||13.09||11.36||12.32||14.21||0.80||-13.22||-13.22||0.00||-1.23||2.94||1.86|
|New Mountain Finance Corporation||(NYSE:NMFC)||13.02||11.62||11.70||13.73||0.85||-10.75||-10.75||0.00||-4.47||0.00||-4.19|
|OFS Capital Corporation||(NASDAQ:OFS)||11.48||11.01||12.35||14.46||0.76||-4.09||-4.09||0.00||0.00||0.00||1.69|
|Oak Hill Advisors||(NASDAQ:OHAI)||3.80||3.37||14.24||6.71||0.50||-11.32||-8.16||0.00||0.00||-25.00||-17.26|
|Prospect Capital Corporation||(NASDAQ:PSEC)||6.98||5.99||16.69||10.17||0.59||-14.18||-14.18||0.00||-4.62||-24.81||-2.87|
|PennantPark Floating Rate Capital||(NASDAQ:PFLT)||11.25||10.92||10.44||13.95||0.78||-2.93||-2.93||0.00||0.00||5.56||-3.13|
|PennantPark Investment Corporation||(NASDAQ:PNNT)||6.18||5.44||20.59||9.82||0.55||-11.97||-7.44||0.00||-14.37||0.00||-10.97|
|Saratoga Investment Corp.||(NYSE:SAR)||15.42||14.12||9.35||22.42||0.63||-8.43||-8.43||-2.56||-11.25||na||0.67|
|Stellus Capital Investment||(NYSE:SCM)||9.64||8.58||15.85||13.62||0.63||-11.00||-7.47||0.00||-1.32||0.00||-4.08|
|Solar Capital Ltd.||(NASDAQ:SLRC)||16.43||16.61||9.63||21.52||0.77||1.10||3.53||-0.57||-0.28||0.00||-3.67|
|Solar Senior Capital Ltd.||(NASDAQ:SUNS)||14.90||13.19||10.69||17.06||0.77||-11.48||-9.82||0.00||0.00||0.00||-3.34|
|Medallion Financial Corp.||(TAXI)||7.04||6.47||15.46||11.37||0.57||-8.10||-8.10||0.00||0.00||4.17||2.90|
|Triangle Capital Corporation||(NYSE:TCAP)||19.11||18.03||11.98||15.48||1.16||-5.65||-5.65||0.00||-0.04||0.00||-6.97|
|TCP Capital Corp.||(NASDAQ:TCPC)||13.93||13.32||10.81||15.10||0.88||-4.38||-4.38||0.00||-1.60||0.00||-2.14|
|THL Credit, Inc.||(NASDAQ:TCRD)||11.70||9.22||14.75||13.03||0.71||-21.20||-21.20||0.00||-0.15||0.00||-1.96|
|TICC Capital Corp.||(NASDAQ:TICC)||6.08||5.08||22.83||7.81||0.65||-16.45||-16.45||0.00||0.00||0.00||-16.91|
|TriplePoint Venture Growth||(NYSE:TPVG)||11.96||9.90||14.55||14.52||0.68||-17.22||-17.22||-2.38||-7.46||0.00||-0.82|
|TPG Specialty Lending||(NYSE:TSLX)||16.22||15.75||9.90||15.62||1.01||-2.90||-2.90||0.00||-5.03||0.00||-0.26|
|With the 10-year Treasury at 1.81% and sector average yield on Q4 dividends at 13.48% - the spread is 1,309 bps.|
|The cap weighted ETF BDCS has a price change of -9.47% year to date - with dividends its total return is -7.22%.|
|The SPY or S&P 500 EFT is -7.81% year to date - and with unreinvested dividends is -7.81% year to date.|
BDC Earnings Growth & P/E Ratios 02-05. Fiscal and calendar years are not in sync. BDCs that began fiscal 2016 on or before calendar Q4-15 include AINV, FULL, FSC, GAIN, GBDC, GLAD, MCC, PSEC, PFLT, and PNNT. The range metric is the high estimate minus the low estimate, with that result dividend by the consensus estimate - and serves as one of several measurements for assessing risk. All EPS projections are from Yahoo Finance - with the exceptions of ASBC and FSIC - where projections are not NIIs.
|Earnings / Share||Earn. Growth||P/E Ratios||Current Fiscal Year|
|Earnings / Share||Earn. Growth||P/E Ratios||Current Fiscal Year|
And now for the three earnings releases:
GAIN Reports NII of $0.1530 compared to a Div of $0.1875/quarter
What They Earned: Gladstone Investment Corp. reported for Q3-16 ending 12-31-15 total investment income of $12.068 million ($0.3987/share) and net investment income of $4.631 million ($0.1530/share). The net decrease in net assets resulting from operations was - $6.213 million (- $0.2052/share). Net asset value was $8.66 compared to $9.05/share last quarter. During Q4, GAIN restructured two investments, which resulted in the conversion of debt with an aggregate cost basis of $19.8 million into preferred equity with a new aggregate cost basis and fair value of $0.4 million. GAIN also exercised existing common stock warrants held in one of the restructured investments for an exercise price of $0.2 million. As a result of these transactions, GAIN recognized an aggregate realized loss of $19.1 million. GAIN exited one investment generating a realized gain of $17.0 million.
What They Own: The GAIN portfolio consisted of investments in 36 portfolio companies located in 18 states across 17 different industries with an aggregate fair value of $471.7 million. The portfolio at fair value was 60.3% in secured first lien debt, 13.3% in secured second lien debt, 20.6% in preferred equity and 5.8% in common equity. GAIN had one investment on non-accrual status, with a cost basis of $1.5 million, or 0.4% of the all debt investments, and a fair value of $1.5 million, or 0.4% of the fair value of all debt investments in the portfolio.
|Realized & Unrealized Gains||-10.844||-6.133||3.396||24.163||1.750||-1.507||5.911||x||-15.088||8.771||-10.522|
|Realized & Unrealized Gains/share||-.3582||-.2026||.1124||.8868||.0661||-.0569||.2233|
|Total investment income||12.068||13.740||12.706||11.173||11.562||9.071||9.837||8.811||8.696|
|Net investment income||4.631||6.022||5.163||4.995||5.839||4.204||4.859||4.644||4.402|
|Investments @ fair value||0.471||0.490||0.481||0.466||0.394||0.347||0.322||0.315||0.291|
|Wt Av Share Count||30.271||30.271||30.206||27.246||26.476||26.476||26.476||26.476||26.476|
|Wt Av Yield||12.6%||12.7%||12.6%||12.5%||12.5%||12.6%||12.6%||12.6%||12.7%|
GAIN had a consensus analyst NII projection of $0.19/share compared to the actual $0.15/share. Those of you using Yahoo to find your earnings estimates to generate your price-to-earnings ratios - I want you to note something quirky going on. (If you are reading price-to-earnings metrics from a source other than a brokerage - then you too are probably - and indirectly - using Yahoo numbers, too.) Here are the current projections from Yahoo Finance:
|Earnings Est||Current Qtr. |
|Next Qtr. |
|Current Year |
|Next Year |
|No. of Analysts||4.00||4.00||4.00||4.00|
I placed the 2016 projection in bold and italic font for a reason. That number should be the sum of the quarterly NII/share numbers for calendar Q2-15, Q3-15, Q4-15 and Q1-16. The information in the header lets us know that the fiscal 2016 ends in March of 2016. We already know the NIIs from the first three quarters of this fiscal year. They were $0.17, $0.20 and $0.15. Those three quarters sum to $0.52. The calendar Q1-16 projection is $0.19 - thus, the fiscal 2016 earnings projection should be $0.71. But the projection Yahoo is displaying is $0.49. I have the perception that there is an absence of quality control in the input of Yahoo earnings projections. I have the expectation that one of the projections Yahoo is using is for GAAP EPS - which is "the net decrease in net assets resulting from operations" - and not "net investment income". For GAIN, calendar Q4-15, GAAP EPS was a negative 20 cents. And that is my theory for why we have a useless earnings projection from Yahoo for 2016. I am currently using $0.72 for my projection - which is one of the few times a number other than a Yahoo number is used in my P/E ratio spreadsheet. I am currently making the same kind of alterations in the projections for ACSF and FSIC.
I have been well served following my first rule of "never buy a falling NAV". In this environment, almost all BDC NAVs are falling. So I have altered that rule to "never buy a BDC with a NAV falling greater than sector average" - and lower your allocation to BDCs when NAVs are falling. Now is the time to be picky.
The GAIN NAV fall is big enough to scare me. I see it's near 11% yield as being less than merited - given the 12.6% portfolio yield. (For BDCs with portfolio yields between over 12% - the average yield on the BDC is 14.13%) My second rule of BDC investing is "never buy an uncovered dividend" - and the GAIN dividend is not covered by NII. Conclusion - stay away from GAIN.
PFLT Reports NII of $0.1903 compared to a dividend of $0.2850
What They Earned: PennantPark Floating Rate Capital reported calendar Q4-15 total investment income of $8.756 million ($0.3276/share). Net investment income was $5.086 million ($0.1903/share). PFLT reported 'core NII' (which adds back three cents per share in credit facility costs - a 'periodically repeating' one time event) of $0.22/share. The net increase in net assets from operations totaled -$1.747 million ($0.0654/share) due to net realized and unrealized losses of $3.339 million. Net asset value per was $13.73 compared to $13.95 last quarter due to NII being 10 cents below the dividend and portfolio losses were twelve cents.
What They Own: PFLT's portfolio totaled $391.3 million and consisted of $335.0 million of senior secured debt, $47.9 million of second lien secured debt and $8.4 million of subordinated debt, preferred and common equity. The debt portfolio consisted of 97% variable-rate investments and 3% fixed-rate investments. PFLT had one company on non-accrual, representing 1.6% of the portfolio on a cost and 0.9% on a fair value basis. The portfolio had net unrealized depreciation of $6.0 million. The portfolio consisted of 76 companies with an average investment size of $5.1 million, had a weighted average yield on debt investments of 7.9%, and was invested 86% in senior secured debt, 12% in second lien secured debt and 2% in subordinated debt, preferred and common equity.
|Realized & Unrealized Gains||-3,339,079||-6,063,000||629,631||1,668,408||-5,030,244||-2,324,344||-118,995||3,512,787||2,828,848|
|Realized & Unrealized Gains/share||-0.1249||-0.3058||0.0423||0.1120||-0.3376||-0.1560||-0.0799||0.2358||0.0190|
|Total investment income||8.756||7.791||7.104||7.983||7.477||8.221||7.668||7.623||6.844|
|Net investment income||5.086||3.369||4.097||4.456||5.468||5.320||4.363||3.725||3.228|
|Investments @ fair value||0.460||0.391||0.373||0.336||0.343||0.348||0.366||0.389||0.371|
|Wt Av Share Count||26.730||19.828||14.898||14.898||14.898||14.898||14.898||14.898||14.898|
|Wt Av Yield||8.2%||7.9%||8.3%||8.4%||8.5%||8.2%||8.2%||8.1%||8.1%|
PFLT is still deploying capital from its acquisition of MCG Capital in late 2015. NII is not expected to cover the dividend in the short term. The consensus analyst NII projection for the quarter was $0.21/share compared to the reported $0.19/share. 2016 NII (which ends in calendar Q3 of this year) is not projected to cover the dividend - but 2017's projected NII is high enough to see a dividend increase in late 2017. I can be patient with PFLT as long as the 2017 earnings projections look so good. At the same time, I am scared by the current NII/share numbers and the NAV fall.
BDC equities tend to sell at yields that are somewhat in alignment with the weighted average yields of their portfolios. PFLT has a portfolio yield of 8.2% while the yield on the stock is 10.44%. Based on this metric, PFLT is noticeably undervalued. The falling NAV and the currently uncovered dividend is justification for this lack of alignment. The redepoyment of capital from the MCG Capital acquisition and the additional shares it bought is the reason for the current lack of dividend coverage.
I purchased my shares of PFLT back in early 2014 - when the quality of its lowering yielding loans and its degree of dividend coverage made it look like a - relatively to all other BDCs - sure thing. PFLT does not look like that now. The yield is up to compensate for those added risks. But I am not sure that the yield is high enough. In this environment, I would stay away from PFLT.
PNNT Reports NII of $0.2314/share compared to a dividend of $0.28
What They Earned: PennantPark Investment Corporation reported calendar Q4-15 total investment income of $35.264 million ($0.4848/share). Net investment income was $16.831 million ($0.2314/share). The net increase in net assets from operations was - $40.775 million (- $0.5605/share) due to $57.587 million in realized and unrealized losses. Net asset value per share was $9.02 compared to $9.82 at the end of Q4-15. "Oil and gas" investments have declined to 5% of the portfolio from 6% in Q4-15. (The high point of the energy weighting was 16%.) During the three months ended December 31, 2015, PNNT repurchased 1.2 million shares of common stock in open market transactions for an aggregate cost (including transaction costs) of $8.4 million - which had a + $0.04/share effect on NAV.
What They Own: The PNNT portfolio totaled $1,261.9 million and consisted of $477.2 million of senior secured debt, $481.6 million of second lien secured debt, $173.1 million of subordinated debt and $130.0 million of preferred and common equity. The debt portfolio consisted of 75% variable-rate investments and 25% fixed-rate investments. As of December 31, 2015, PNNT had three companies on non-accrual, representing 5.4% of the portfolio on a cost and 1.2% at a fair value basis. The portfolio had net unrealized depreciation of $165.1 million. The portfolio consisted of 62 companies with an average investment size of $20.4 million, had a weighted average yield on debt investments of 12.2% and was invested 38% in senior secured debt, 38% in second lien secured debt, 14% in subordinated debt and 10% in preferred and common equity.
|Realized & Unrealized Gains||-57.587||-18.646||-15.718||-14.717||-43.423||-21.250||18.753||20.652||21.500||5.379||-3.869||12.910|
|Realized & Unrealized Gains/share||-.7917||-.2483||-.2102||-.1960||-.5783||-.2830||.2817||.3102||.3230||.0808||-.2936||.2216|
|Total investment income||35.264||39.122||40.641||42.661||39.205||40.144||35.475||37.879||34.439|
|Net investment income||16.831||20.031||20.654||22.096||19.477||20.148||13.196 *||20.029||17.955|
|Investments @ fair value||1.262||1.299||1.294||1.300||1.341||1.318||1.198||1.257||1.209|
|Wt Av Share Count||72.741||75.093||74.780||75.093||75.093||75.093||66.569||66.569||66.547|
|Weighted Average Yield||12.2%||12.1%||12.4%||12.4%||12.5%||12.5%||12.3%||12.7%||13.2%|
|PNNT had $3.85 million ($0.0578/share) in debt issuance costs in Q2-14|
Early this week I wrote an article on the PNNT earnings release and that article can be found at this link. (The quality of content and information in the comment section may be better than the article.)
Summation: Four out of four BDCs reporting this week had NII or earnings disappointments. Three out of four had noticeable falls in the NAV. That is the bad news. The good news is that the market was prepped for this bad news. And the current BDC valuations are prepped for the bad news. None of the stocks had negative year-to-date price reactions to their bad news.
Disclosure: I am/we are long AINV, ARCC, MAIN, MRCC, PFLT, PNNT.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I also own baby bonds in HTGC, MCC and TCAP.