3 Signs That THL Credit Is Headed For A Dividend Cut

| About: THL Credit (TCRD)

Summary

TCRD has never had a dividend cut and consistently has Net Investment Income to cover its dividend. Based on those numbers, a cut is unlikely.

But TCRDs NAV is falling along with NII. NII has been assisted recently by very low incentive income fees going to management.

Add to those factors, the portfolio weighted average yield is falling as TCRD transitions its portfolio toward senior loans.

I want to start with the sector numbers, so that we can see with our own eyes what can of news is already priced into THL Credit (NASDAQ:TCRD). I will then covered the Q2-16 earnings release of Friday August 5th. I will then provide the math that makes the case that a dividend cut appears to be coming for this stock.

BDCs 08-05-16

Yield in the spreadsheet below is based on the Q3-16 'regular' dividend. Spreadsheet header abbreviations: Div = dividend; EPS = earnings per share; LTM = last twelve months; 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/NIIltm column. After the Price/NAV ratio, the next column displays the percent change in price YTD. The next display price change plus YTD dividends accrued on the payment date - not the earned date. For the last four columns - the first measures the percentage change in the 2016 EPS projection since the beginning of the year; the second measures the change in the price target since the beginning of the year; the third measures the change in the Q3-16 dividend from the Q3-15 dividend; and the last measures the change in NAV between Q1-16 and Q1-15. Special dividends are not included in this data. ARCC, FDUS, MAIN and TCPC have paid special dividends on a near regular schedule. Full announced 6-24 it will merge with Great Elm Capital Corp to form net yet traded GECC.

Share Price Div/ Div/ Div/ Div/ Q1-16 Price YTD Percent Change LTM % LTM %
______The_Company_name_and_stock_ticker______ 1-01 08-05 Yield EPS16 EPS17 NIIltm NAV NAV NAV Price Pr+Div EPS Target DivChng NAVChng
Alcentra Capital Corporation (NASDAQ:ABDC) 11.60 12.31 11.05 88.9 93.2 92.3 9.4 14.41 0.85 6.12 14.91 6.99 -4.92 0.00 -3.29
American Capital Senior Floating (NASDAQ:ACSF) 9.83 10.80 10.74 86.6 100.0 92.7 9.9 11.72 0.92 9.87 18.72 8.94 -14.08 0.00 -19.23
Apollo Investment Corporation (NASDAQ:AINV) 5.22 5.64 10.64 71.4 81.1 72.4 8.2 7.28 0.77 8.05 16.67 0.00 -19.86 -25.00 -11.00
Ares Capital Corporation (NASDAQ:ARCC) 14.25 15.46 9.83 98.7 93.8 94.8 9.2 16.50 0.94 8.49 13.82 -3.14 -5.00 0.00 -1.26
BlackRock Capital Investment (NASDAQ:BKCC) 9.40 8.44 9.95 81.6 89.4 87.8 8.7 9.64 0.88 -10.21 -5.74 1.98 -17.29 0.00 -8.88
CM Finance Inc (NASDAQ:CMFN) 10.02 9.70 14.31 95.1 106.8 87.4 11.6 11.96 0.81 -3.19 7.20 15.87 -26.67 0.00 -17.06
Capitala Finance Corp. (NASDAQ:CPTA) 12.08 14.74 9.53 73.9 75.9 79.9 8.6 16.29 0.90 22.02 30.74 -1.04 -14.95 -25.32 -11.23
Fidus Investment Corporation (NASDAQ:FDUS) 13.69 15.76 9.90 98.1 95.7 92.8 10.2 15.25 1.03 15.12 20.82 -4.79 -0.70 0.00 0.39
Fifth Street Finance Corp. (NYSE:FSC) 6.38 5.63 12.79 101.4 96.0 101.9 8.6 8.33 0.68 -11.76 -5.27 -7.79 -17.34 0.00 -9.26
Fifth Street Senior Floating Rate (NASDAQ:FSFR) 8.57 8.51 10.58 100.0 93.8 99.5 8.1 11.18 0.76 -0.70 7.18 -9.09 -8.53 0.00 -10.27
Franklin Square Investment Corp (NYSE:FSIC) 8.99 9.47 9.42 101.4 101.4 82.1 10.1 8.82 1.07 5.34 12.78 -12.00 -9.24 0.00 -10.91
Full Circle Capital Corporation (FULL) 2.47 2.60 16.15 120.0 85.7 92.4 11.6 3.61 0.72 5.26 13.77 -16.67 2.18 0.00 -18.51
Gladstone Investment Corporation (NASDAQ:GAIN) 7.67 8.05 9.32 98.7 98.7 109.5 8.1 9.22 0.87 4.95 10.66 5.56 6.06 0.00 0.44
Garrison Capital Inc. (NASDAQ:GARS) 12.17 10.42 13.44 102.2 96.6 82.9 10.4 13.50 0.77 -14.38 -8.63 -12.74 -17.17 0.00 -12.39
Golub Capital BDC, Inc. (NASDAQ:GBDC) 16.63 18.66 6.86 100.8 100.0 104.6 8.1 15.85 1.18 12.21 17.98 -4.51 3.35 0.00 1.54
Gladstone Capital Corporation (NASDAQ:GLAD) 7.31 8.27 10.16 100.0 100.0 92.2 10.6 7.92 1.04 13.13 19.84 0.00 -16.38 0.00 -17.07
Goldman Sachs BDC (NYSE:GSBD) 19.00 19.99 9.00 85.7 87.0 81.6 9.6 18.67 1.07 5.21 12.32 1.94 -5.67 0.00 -3.81
Harvest Capital Credit (NASDAQ:HCAP) 11.73 12.92 10.45 101.5 95.7 83.1 9.7 13.90 0.93 10.14 16.76 -6.34 -8.47 0.00 -2.80
Share Price Div/ Div/ Div/ Div/ Q1-16 Price YTD Percent Change LTM LTM
_____The_Company_name_and_stock_ticker____ 1-01 08-05 Yield EPS16 EPS17 NIIltm NAV NAV NAV Price Pr+Div EPS Target Div NAV
Horizon Technology Finance Corp (NASDAQ:HRZN) 11.73 13.50 10.22 95.2 97.9 103.7 10.1 13.62 0.99 15.09 21.85 2.11 -1.65 0.00 -4.02
Hercules Capital (NASDAQ:HTGC) 12.19 13.67 9.07 103.3 94.7 109.8 12.6 9.81 1.39 12.14 17.23 -8.40 2.83 0.00 -6.30
KCAP Financial,Inc. (NASDAQ:KCAP) 4.07 4.04 14.85 111.1 105.3 94.5 10.9 5.50 0.73 -0.74 10.32 -18.18 -11.82 -28.57 -23.18
Main Street Capital Corporation (NYSE:MAIN) 29.08 33.97 6.54 101.4 97.8 100.6 10.5 21.18 1.60 16.82 21.91 -6.81 -2.90 2.78 -3.16
Medley Capital Corporation (NYSE:MCC) 7.52 7.29 16.46 114.3 114.3 104.8 12.2 9.80 0.74 -3.06 4.92 -14.63 -20.72 0.00 -16.10
Monroe Capital Corporation (NASDAQ:MRCC) 13.09 15.55 9.00 82.4 87.0 86.1 9.7 14.45 1.08 18.79 24.14 5.59 0.68 0.00 2.41
New Mountain Finance Corporation (NYSE:NMFC) 13.02 13.65 9.96 100.0 97.8 106.6 10.6 12.87 1.06 4.84 10.06 -4.90 -6.67 0.00 -7.34
OFS Capital Corporation (NASDAQ:OFS) 11.48 13.55 10.04 96.5 85.5 92.0 9.3 14.65 0.92 18.03 26.92 -4.73 10.43 0.00 2.88
Oak Hill Advisors (NASDAQ:OHAI) 3.80 2.19 21.92 129.7 111.6 100.7 9.9 4.85 0.45 -42.37 -32.89 -13.95 0.00 0.00 -33.29
Prospect Capital Corporation (NASDAQ:PSEC) 6.98 8.29 12.06 97.1 102.0 96.6 10.4 9.61 0.86 18.77 27.01 0.98 -14.82 0.00 -6.70
PennantPark Floating Rate Capital (NASDAQ:PFLT) 11.25 12.67 9.00 112.9 99.1 125.7 8.4 13.54 0.94 12.62 18.45 0.00 -3.85 0.00 -5.31
PennantPark Investment Corp (NASDAQ:PNNT) 6.18 7.41 15.11 107.7 113.1 104.8 12.7 8.83 0.84 19.90 28.96 2.97 -13.89 0.00 -13.85
Saratoga Investment Corp. (NYSE:SAR) 15.42 17.10 9.59 85.9 85.0 85.6 7.4 22.06 0.78 10.89 16.21 -2.05 -8.75 24.24 -2.82
Stellus Capital Investment (NYSE:SCM) 9.64 11.05 12.31 103.8 100.7 109.9 10.4 13.06 0.85 14.63 25.21 -1.50 -6.35 0.00 -6.91
Solar Capital Ltd. (NASDAQ:SLRC) 16.43 20.36 7.86 93.0 87.9 101.5 7.6 21.08 0.97 23.92 28.79 -1.15 -0.14 0.00 -3.79
Solar Senior Capital Ltd. (NASDAQ:SUNS) 14.90 16.70 8.44 94.0 99.3 104.5 8.4 16.70 1.00 12.08 16.81 6.38 0.00 0.00 -5.38
Medallion Financial Corp. (NASDAQ:MFIN) 7.04 6.37 15.70 99.0 91.7 60.2 8.7 11.46 0.56 -9.52 -2.41 -21.09 -8.09 0.00 2.69
Triangle Capital Corp (NYSE:TCAP) 19.11 19.89 9.05 105.9 89.6 94.3 12.0 15.02 1.32 4.08 8.79 -25.76 -6.90 -16.67 -3.96
TCP Capital Corp. (NASDAQ:TCPC) 13.93 15.86 9.08 93.5 91.1 87.9 9.8 14.66 1.08 13.85 19.02 -6.10 -4.80 0.00 -2.46
THL Credit, Inc. 11.70 10.70 12.71 96.5 100.0 92.8 11.1 12.24 0.87 -8.55 -2.74 0.71 -11.70 0.00 -7.27
TICC Capital Corp. (NASDAQ:TICC) 6.08 5.67 20.46 173.1 246.8 200.1 19.7 5.89 0.96 -6.74 2.80 -5.63 -37.50 0.00 -32.45
TriplePoint Venture Growth (NYSE:TPVG) 11.96 11.06 13.02 98.6 87.8 100.1 10.7 13.40 0.83 -7.53 -1.51 -13.10 -23.10 0.00 -7.46
TPG Specialty Lending (NYSE:TSLX) 16.22 17.97 8.68 91.8 90.7 86.9 10.3 15.11 1.19 10.79 18.00 1.19 -1.26 0.00 -3.14
WhiteHorse Finance (NASDAQ:WHF) 11.48 11.59 12.25 99.3 99.3 95.3 10.7 13.28 0.87 0.96 10.24 -0.69 -15.14 0.00 -11.47
Sector Average 11.37 99.8 10.1 0.93 5.60 12.68 -3.94 -8.59 -8.40
With the 10 Treasury at 1.57% and sector average yield on Q2 dividends at 11.37% - the spread is 980 bps.
The cap weighted ETF BDCS has a price change of 6.16% year to date - with dividends its total return is 12.88%.
The SPY or S&P 500 EFT is 7.02% year to date. - and with unreinvested dividends is 8.06% year to date.
Click to enlarge
BDC Earnings Growth & P/E Ratios 08-05

Fiscal and calendar years are not in sync. BDCs than 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
Co. 2011 2012 2013 2014 2015 2016 2017 14-15 15-16 16-17 2015 2016 2017 High Low Range Yr End
ABDC 0.00 0.00 0.00 0.86 1.43 1.53 1.46 66.28% 6.99% -4.58% 8.61 8.05 8.43 1.49 1.11 24.84% Dec
ACSF 0.00 0.00 0.00 0.38 1.29 1.34 1.16 239.47% 3.88% -13.43% 8.37 8.06 9.31 1.17 1.09 5.97% Dec
AINV 0.99 0.83 0.83 0.91 0.82 0.84 0.74 -9.89% 2.44% -11.90% 6.88 6.71 7.62 0.88 0.79 10.71% Mar
ARCC 1.56 1.65 1.64 1.43 1.54 1.54 1.62 7.69% 0.00% 5.19% 10.04 10.04 9.54 1.61 1.49 7.79% Dec
BKCC 1.00 1.00 0.78 0.91 0.97 1.03 0.94 6.59% 6.19% -8.74% 8.70 8.19 8.98 1.07 0.93 13.59% Dec
CMFN 0.00 0.00 0.00 1.17 1.48 1.46 1.30 26.50% -1.35% -10.96% 6.55 6.64 7.46 1.42 1.39 2.05% Jun
CPTA 0.00 0.00 0.00 1.54 1.66 1.90 1.85 7.79% 14.46% -2.63% 8.88 7.76 7.97 1.47 1.28 10.00% Dec
FDUS 1.63 1.54 1.54 1.62 1.64 1.59 1.63 1.23% -3.05% 2.52% 9.61 9.91 9.67 1.71 1.62 5.66% Dec
FSC 1.01 1.07 1.01 0.99 0.75 0.71 0.75 -24.24% -5.33% 5.63% 7.51 7.93 7.51 0.76 0.68 11.27% Sep
FSFR 0.00 0.00 0.00 0.96 0.96 0.90 0.96 0.00% -6.25% 6.67% 8.86 9.46 8.86 0.93 0.88 5.56% Sep
FSIC 0.00 0.00 0.00 0.80 0.92 0.88 0.88 15.00% -4.35% 0.00% 10.29 10.76 10.76 0.92 0.61 35.23% Dec
FULL 0.84 0.78 0.77 0.71 0.63 0.35 0.49 -11.27% -44.44% 40.00% 4.13 7.43 5.31 0.34 0.34 0.00% Jun
GAIN 0.73 0.62 0.68 0.73 0.75 0.76 0.76 2.74% 1.33% 0.00% 10.73 10.59 10.59 0.75 0.70 6.58% Mar
GARS 0.00 0.00 1.28 1.31 1.79 1.37 1.45 36.64% -23.46% 5.84% 5.82 7.61 7.19 1.53 0.91 45.26% Dec
GBDC 1.16 1.15 1.29 1.26 1.26 1.27 1.28 0.00% 0.79% 0.79% 14.81 14.69 14.58 1.34 1.27 5.51% Sep
GLAD 0.88 0.91 0.88 0.87 0.84 0.84 0.84 -3.45% 0.00% 0.00% 9.85 9.85 9.85 0.85 0.84 1.19% Sep
Earnings / Share Earn. Growth P/E Ratios Current Fiscal Year
Co. 2011 2012 2013 2014 2015 2016 2017 14-15 15-16 16-17 2015 2016 2017 High Low Range
GSBD 0.00 0.00 0.00 1.77 2.04 2.10 2.07 15.25% 2.94% -1.43% 9.80 9.52 9.66 2.13 2.06 3.33% Dec
HCAP 0.00 0.00 0.00 1.34 1.36 1.33 1.41 1.49% -2.21% 6.02% 9.50 9.71 9.16 1.48 1.03 33.83% Dec
HRZN 1.50 1.41 1.39 1.11 1.25 1.45 1.41 12.61% 16.00% -2.76% 10.80 9.31 9.57 1.43 1.39 2.76% Dec
HTGC 0.91 0.97 1.23 1.13 1.04 1.20 1.31 -7.96% 15.38% 9.17% 13.14 11.39 10.44 1.24 1.10 11.67% Dec
KCAP 0.70 0.89 0.91 0.97 0.65 0.54 0.57 -32.99% -16.92% 5.56% 6.22 7.48 7.09 0.54 0.53 1.85% Dec
MAIN 1.69 2.01 2.02 2.20 2.18 2.19 2.27 -0.91% 0.46% 3.65% 15.58 15.51 14.96 2.23 2.11 5.48% Dec
MCC 0.56 1.31 1.53 1.58 1.27 1.05 1.05 -19.62% -17.32% 0.00% 5.74 6.94 6.94 2.23 2.03 19.05% Sep
MRCC 0.00 0.00 1.16 1.55 1.60 1.70 1.61 3.23% 6.25% -5.29% 9.72 9.15 9.66 1.79 1.53 15.29% Dec
NMFC 0.56 1.35 1.52 1.41 1.39 1.36 1.39 -1.42% -2.16% 2.21% 9.82 10.04 9.82 1.38 1.14 17.65% Dec
OFS 0.00 0.65 0.62 0.99 1.40 1.41 1.59 41.41% 0.71% 12.77% 9.68 9.61 8.52 1.44 1.32 8.51% Dec
OHAI 0.73 0.55 0.64 0.61 0.37 0.37 0.43 -39.34% 0.00% 16.22% 5.92 5.92 5.09 0.37 0.37 0.00% Dec
PSEC 1.09 1.63 1.57 1.19 1.03 1.03 0.98 -13.45% 0.00% -4.85% 8.05 8.05 8.46 1.04 0.98 5.83% Jun
PFLT 0.05 1.01 1.10 1.12 1.08 1.01 1.15 -3.57% -6.48% 13.86% 11.73 12.54 11.02 1.05 0.98 6.93% Sep
PNNT 1.25 1.08 1.01 1.06 1.10 1.04 0.99 3.77% -5.45% -4.81% 6.74 7.13 7.48 1.08 1.02 5.77% Sep
SAR 2.15 1.86 1.86 1.85 1.80 1.91 1.93 -2.70% 6.11% 1.05% 9.50 8.95 8.86 1.89 1.89 0.00% Dec
SCM 0.00 0.00 1.34 1.34 1.33 1.31 1.35 -0.75% -1.50% 3.05% 8.31 8.44 8.19 1.36 1.18 13.74% Dec
SLRC 2.25 2.20 1.89 1.56 1.52 1.72 1.82 -2.56% 13.16% 5.81% 13.39 11.84 11.19 1.74 1.58 9.30% Dec
SUNS 0.63 1.31 1.18 1.20 1.33 1.50 1.42 10.83% 12.78% -5.33% 12.56 11.13 11.76 1.78 1.37 27.33% Dec
MFIN 1.01 1.21 1.14 1.14 1.20 1.01 1.09 5.26% -15.83% 7.92% 5.31 6.31 5.84 1.16 1.07 8.91% Dec
TCAP 2.06 2.16 2.25 2.08 2.16 1.70 2.01 3.85% -21.30% 18.24% 9.21 11.70 9.90 2.18 1.69 28.82% Dec
TCPC 0.00 1.81 1.63 1.56 1.63 1.54 1.58 4.49% -5.52% 2.60% 9.73 10.30 10.04 1.64 1.46 11.69% Dec
TCRD 1.04 1.38 1.45 1.42 1.41 1.41 1.36 -0.70% 0.00% -3.55% 7.59 7.59 7.87 1.48 1.38 7.09% Dec
TICC 0.94 1.12 1.04 1.05 0.73 0.67 0.47 -30.48% -8.22% -29.85% 7.77 8.46 12.06 0.49 0.39 14.93% Dec
TPVG 0.00 0.00 0.00 1.30 1.44 1.46 1.64 10.77% 1.39% 12.33% 7.68 7.58 6.74 1.45 1.42 2.05% Dec
TSLX 0.00 1.36 1.66 2.07 1.77 1.70 1.72 -14.49% -3.95% 1.18% 10.15 10.57 10.45 1.72 1.58 8.24% Dec
WHF 0.00 0.00 1.28 1.14 1.48 1.43 1.43 29.82% -3.38% 0.00% 7.83 8.10 8.10 1.50 1.34 11.19% Dec
BDC Average 8.76 -2.24 1.86 9.07 9.21 9.11 11.25
Click to enlarge

And now for the Q2-16 earnings release:

THL Credit reported for Q2-16 Total Investment Income of $20.480 million ($0.6162/share). Net Investment Income was $11.622 million ($0.3509/share). The NII/TII ratio was 57%. The Net Increase in Net Assets Resulting from Operations was - $0.660 million ($0.0199/share). TCRD had net realized and unrealized losses on portfolio investments of $12.170 million during Q1-16. TCRD's net asset value per share was $11.88 compared to $12.24 at the end of Q1-16 - a fall of 3%.

The consensus analyst projections from Yahoo Finance:

Current Qtr. Next Qtr. Current Year Next Year
No. of Analysts 9 9 8 8
Avg. Estimate 0.34 0.34 1.42 1.39
Low Estimate 0.32 0.32 1.38 1.28
High Estimate 0.36 0.36 1.48 1.56
Year Ago EPS 0.35 0.35 1.41 1.42
Click to enlarge
Revenue Estimate Current Qtr. Next Qtr. Current Year Next Year
No. of Analysts 5 5 5 6
Avg. Estimate 23.06M 23.04M 91.76M 93.87M
Low Estimate 22.4M 22.44M 89.85M 90.63M
High Estimate 23.43M 23.83M 94M 99M
Year Ago Sales 23.75M 23.12M 94.19M 91.76M
Click to enlarge

My spreadsheets on TCRD:

Q2-16 Q1-16 Q4-15 Q3-15 Q2-15 Q1-15 Q4-14 Q3-14 Q2-14 Q1-14 Q4-13 Q3-13 Q2-13 Q1-13
Realized & Unrealized Gains -12.170 -13.136 -16.077 - 9.055 2.125 3.652 -7.663 -0.272 -3.424 -0.609 0.200 -3.531 2.101 1.699
Realized & Unrealized Gains/share -0.3662 -0.3944 -0.4823 -0.2702 0.0629 0.1077 -0.2260 -0.0080 -0.0841 -0.0180 0.0059 -0.1041 0.0781 0.0646
Incentive Fees 0.000 0.030 3.000 2.912 2.983 2.978 3.200 2.944 2.321 2.745 2.600 2.053 3.728 2.312
Incentive Fees/share 0.0000 0.0009 0.0900 0.0869 0.0882 0.0878 0.0944 0.0868 0.0685 0.0810 0.0767 0.0606 0.1386 0.0879
Click to enlarge

The realized and unrealized gains along with incentive fee lines are in millions of dollars. The line beneath them are in dollars per share. There is a boat load of bad news in these numbers. TCRD has had $50.438 million in portfolio markdowns over the last four quarters. As you are about to see, the fall in the portfolio generating income has fallen even more than that.

I also want you to note that the incentive fees per share have fallen from a eight cent subtraction from NII (or Net Investment Income) to a zero cent subtraction. Once the bad news on portfolio losses stop - those fees return towards their norm. This quarters NII of $0.36/share adjusted for a seven cent incentive fee would only be $0.29/share. And it is this adjustment that is the first sign that a dividend cut is in th future

Q2-16 Q1-16 Q4-15 Q3-15 Q2-15 Q1-15 Q4-14 Q3-14 Q2-14 Q1-14 Q4-13
Total investment income 20.480 22.572 23.565 23.117 23.751 23.762 24.100 23.145 23.745 20.895 18.500
Net investment income 11.662 13.398 12.079 11.649 11.934 11.910 12.400 12.223 12.887 10.981 9.100
Investments @ fair value 0.692 0.751 0.754 0.748 0.792 0.748 0.784 0.718 0.742 0.739 0.649
Wt Av Share Count 33.234 33.303 33.333 33.507 33.810 33.905 33.905 33.905 33.905 33.905 33.905
TII/share $0.6162 $0.6778 $0.7070 $0.6899 $0.7025 $0.7008 $0.7108 $0.6826 $0.7003 $0.6163 $0.5456
NII/share $0.3509 $0.4023 $0.3628 $0.3476 $0.3530 $0.3513 $0.3657 $0.3608 $0.3801 $0.3239 $0.2684
NAV/share $11.88 $12.24 $12.58 $13.03 $13.29 $13.20 $13.08 $13.29 $13.28 $13.34 $13.36
Wt Av Yield 10.9% 11.0% 11.2% 11.7% 11.8% 11.7% 11.7% 11.3% 11.1% 11.0% 11.7%
NII/TII ratio 56.9% 59.4% 51.3% 50.4% 50.2% 50.1% 51.5% 52.8% 54.3% 52.6% 49.2%
Dividend/share $0.34 $0.34 $0.34 $0.34 $0.34 $0.34 $0.34 $0.34 $0.34 $0.3 $0.2
In Q2-15 TCRD repurchased $3.8 million of common stock at an average price of $12.38 - approx. 307 thousand shares
Click to enlarge

The TCRD portfolio has fallen from $792 million at the end of Q2-15 to $692 million at the end of Q2-16. At the same time, the portfolio weighted average yield (or PWAY) has fallen from 11.8% to 10.9%.

There are several BDCs that are suffering from lower NII dollars due to the poor condition of the economy which is decrementing deal flow. Some BDCs depend on portfolio churn to trigger the early loan termination fees to generate the NII to cover their dividend. Here is a look at those stats for TCRD:

Q2-16 Q1-16 Q4-15 Q3-15 Q2-15 Q1-15 Q4-14 Q3-14 Q2-14 Q1-14 Q4-13 Q3-13 Q2-13 Q1-13
Interest income 16.684 19.340 20.400 20.851 21.110 21.147 22.500 21.895 21.760 17.552 18.300 17.694 16.888 13.890
Dividend Income 2.613 2.418 2.300 1.202 1.069 0.328 0.100 2.599 0.637 2.147 -0.800 0.356 4.527 0.000
Fee/Other Income 1.183 0.814 1.000 1.064 1.572 2.287 1.700 1.021 1.348 1.196 1.200 1.014 1.257 0.533
Total Income 20.480 22.572 23.600 23.117 23.751 23.762 24.100 23.145 23.745 20.895 18.500 19.064 22.672 14.423
Fees Income Percent 5.78% 3.61% 4.24% 4.60% 6.62% 9.62% 7.05% 4.41% 5.68% 5.72% 6.48% 5.32% 5.54% 3.70%
Click to enlarge

While TCRD is experiencing a low tide in fee income - the drop in fee income is not having a dramatic impact on total income.

As TCRD reminded us in their conference call, "payment of the quarterly incentive fee is directly tied to our asset performance in such a way to protect the shareholders in the event of both realized and unrealized losses". There is basically eight cents of protection in the Q1 and Q2-16 NII/share numbers. Subtracting that eight cents from forward NII would be an overly simplistic way of calculating a run rate NII. The data below shows a moderately simplistic way of calculating a run rate NII:

TII Calculation
Metric Fee Income Interest Income Totals
Formula average for next 4 quarters portfolio times yield / 4 Sum of components
Numbers 1.015 692 million times .109 / 4 19.872
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NII Calculation
Metric NII/TII Ratio NII NII/share Result
Formula TII times NII/TII NII/ share count
Numbers 52% .52 times 19.872 10.333 / 33.234 $0.3109/share
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The current (and lower) portfolio size combined an also lower PWAY will produce a much lower NII/share for TCRD. And the lower NII/share production will not support the current $0.34/share per quarter dividend. The $0.31/share quarterly NII run rate is the second sign that a dividend cut is coming.

A secure dividend also strongly tends to belong to BDCs that have 'dividend to NAV ratios' that are roughly 150 bps below their portfolio weighted average yields (or PWAY). TCRD was in trouble on this metric in Q1-16, when the dividend/NAV ratio of 11.0% was equal to the PWAY of 11.0%. With the fall in the NAV, the current dividend/NAV ratio is now (136/1188) 11.45% compared to a PWAY of 10.9%. This is the third sign that a dividend cut is coming.

What is the cause of this dividend cut expectation?

The primary cause is the cumulative size of the portfolio markdowns. And those have been caused by a growing non-accrual problem.

As of June 30, 2016, THL Credit had three loans on non-accrual status with an aggregate amortized cost of $54.5 million and fair value of $30.1 million, or 7.6% and 4.4% of the portfolio's amortized cost and fair value.

As of March 31, 2016, THL Credit had one loan on non-accrual status with an aggregate amortized cost of $20.6 million and fair value of $11.5 million, or 2.8% and 1.6% of the portfolio's amortized cost and fair value.

As of Dec. 31, 2015, THL Credit had two loans on non-accrual status with an aggregate amortized cost of $25.0 million and fair value of $13.9 million, or 3.3% and 1.8% of the portfolio's amortized cost and fair value.

The current TCRD yield of 12.71% is now 100 bps below the sector average. Is the cut already priced in?

That depends on your forward dividend projection. The numbers from the first sign points towards a quarterly NII around $0.29/share. My simplistic NII projection formula points towards a quarterly projection of $0.31/share. The first sign points to a $0.28 dividend and the second to a $0.30 dividend.

If the safe dividend amount would produce a Dividend/NAV ratio that is 150 basis points below the PWAY - that ratio would be 9.4%. And the quarterly dividend that is 9.4% of $11.88 would be $0.27918/share. With two of the three numbers point to $0.28 - that is the number I will use for the valuation assessment.

A $0.28/quarter dividend on the current price of $11.88 produces a yield of 9.43%. BDCs strongly tend to sell at yields that come relatively close to matching their PWAY. There are exceptions - with lower yields belonging to NAV growing BDCs with strong dividend coverage - and higher yields belonging to NAV shrinking BDCs lacking dividend coverage. With a PWAY of 10.9%, the current yield is still too low. For a stock with $0.28 dividend to sell at a yield of 10.9%, the share price would need to be $10.27. Based on those numbers, a dividend cut to $0.28/quarter is not priced in to TCRD.

Conclusion: Sell it if you got it. Stay away from it if you do not. I fully acknowledge that projecting a dividend cut for a BDC that still appears to have acceptable dividend coverage is a difficult call. At the same time, there is abundant evidence that the current NII number is something of a mirage. Still, I can only provide 'evidence' that a dividend cut is coming and TCRD is still over valued - not proof.

Disclosure: I am/we are long AINV, ARCC, MRCC, PFLT, PNNT, TCPC.

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.