The next article in the series written about a year ago featured 5 BDCs with relatively conventional strategies and portfolios. All but one of the BDCs were, at the time, trading at less than 90% of NAV. The shares of four out of five have gone up in price since then. Throughout the group, there have been some secondary stock offerings and also public offering of notes and bonds. There seems to be a general orientation toward the acceptance of a bit more leverage, but that trend is by no means universal. There also appears to be a gradual migration of portfolios toward senior secured debt and away from the riskier types of investment instruments.
One company in the group did a presentation about the BDC industry in general and two things about the data featured in the presentation are striking. First of all, the BDC sector is still tiny (roughly $30 billion in total assets and a market cap of roughly $21 billion) compared to other subparts of the financial sector in a world in which we now have trillion dollar banks. Secondly, the BDC sector has been steadily growing in both market cap and total assets and appears to have become quite a bit larger than it was prior to the 2008 Crash and, of course, a lot larger than it was in the middle of the Crash. The general impression that I get from reading BDC presentations is that the middle market and especially the lower middle market corporate lending market is still underserved by the banks and that this has been one factor allowing BDCs to expand. After each company's name, I will provide the price of the stock when the original article was written, the price at Wednesday's close and the dividend yield.
1. Medley (MCC) (10.50) (14.62) (9.9%) - MCC should really have been classified as a newbie because it commenced operations not long before the original article. As a recent entrant, MCC has not been as burdened by "legacy loans" made prior to the Crash as some other BDCs and has generally not experienced default issues. Its price appreciation reflects the market's thirst for sources of relatively reliable yield and it is now trading at a premium to NAV of $12.60 a share. As of the close of the most recent quarter, MCC's portfolio was roughly equally divided between first lien senior secured loans and second lien senior secured loans. MCC seems to take an equity kicker as part of some of its loan transactions and that could create the potential for asset appreciation,
2. Gladstone Capital (GLAD) (7.79) (9.02) (11.2%) - GLAD, along with Gladstone Investment (GAIN), is one of the BDCs led by David Gladstone who has had extensive experience in the industry and can now certainly claim to have been through good times and bad. GLAD had some lender and leverage issues which have been resolved. GLAD has a preferred stock for investors who would like a somewhat safer dividend. GLAD is conservatively operated and focuses on lending to lower middle market companies. GLAD now has roughly 95% of its assets in debt instruments and has pulled through the Crash nicely rewarding patient investors who bought in when it was trading at a big discount to NAV.
3. BlackRock Kelso Capital (BKCC) (8.67) (10.03) (10.4%) - BKCC is a relatively large BDC. It recently sold 30 year notes priced to yield 6.625%. 70% of its portfolio consists of senior debt and it has had a solid track record. BKCC pulled through the Crash and the recession relatively well although there were inevitably some asset write downs. In a couple of recent quarters, there have also been some write downs on the portfolio but things seem to have stabilized. As with many other BDCs, BKCC seems to be moving in the direction of using a bit more leverage but also tightening up the portfolio mix to include a higher percentage of senior secured debt.
4. Apollo Investment (AINV) (8.95) (7.93) (10.1%) - AINV is one of the only BDCs to have seen a declining share price since the first series of articles. It has various steps to implement a new strategy including somewhat less leverage, a focus on senior secured lending to middle market companies, and a reduction in dividends. It is changing its asset mix to include a higher percentage of first lien loans and lower percentages of equity and subordinated debt. It has also put together an energy team to focus on lending to that industry.
5. PennantPark Investment (PNNT) (10.22) (10.76) (10.4%) - PNNT recently completed a secondary stock offering priced at $10.82 per share. It is trading a bit above last quarter's closing NAV of $10.16. Although it was in existence and making loans prior to the Crash, it had a relatively low default rate and generally is viewed as being capably managed. It is probably a relatively reliable source of yield but may not see much share price appreciation in the near future - partially because of the recent offering.
These BDCs follow the pattern of holding debt instruments as the dominant asset class in their portfolios. They had all stabilized by the time of the first article and are now back to more of a "business as usual" with, however, one eye carefully focused on limiting risk both in the form of leverage and in the form of asset mix. From a macroeconomic point of view, these companies give us a window on the world of middle market lending. It appears that the banks have not exactly charged into this market and have left an opening for the BDCs to grow into. Of course, the banks' lack of enthusiasm for this part of the lending market does not bode well for the economy in general.
None of these stocks will make you as rich as a lottery win. But they are solid, reliable sources of yield and have modest potential for appreciation. Each of these stocks is a reasonable component of a diversified BDC portfolio as part of a larger yield oriented portfolio.