BDC Buzz

Dividend investing, high income, bdcs, activist investor
BDC Buzz
Dividend investing, high income, BDCs, activist investor
Contributor since: 2013
Company: BDC Buzz
Sean - I look forward to your article with your typical expert views on a complicated topic. Please provide a link in these comments when it is available.
darnoc - CLO equity valuations take into account a DCF approach with various assumptions that can create a range of potential values. Not straightforward unless the assumptions used had tighter restrictions. A large uptick in defaults for the investments in a CLO could have amplified impacts to the residuals paid to the equity holders including declines in income and of course value. At that point, the company would be required to mark down the investments. However, right now the income stream off the CLO equity is stable and that is what higher marks are assuming for the future payments as well.
Spec - The article mentioned more companies than just ECC for relative valuations and many of them are consistent with their marks but PSEC has been 20% higher for the same/similar investments.
There's a quote in the article from CEF Advisors: “We’ve got an industry in which the standards of valuation still haven’t been addressed even since the crisis—even though we know that was one of the problems during the crisis,”
As for other companies having reasons to want lower marks - I do not see a scenario where that would be beneficial as there are leverage ratios, credit ratings and fees to managers that depend on higher values.
WSJ reported the following yesterday and it includes specific security discussions from the table in this article.
Loan Valuations (at PSEC) Draw Scrutiny:
"Prospect owns a security called CIFC Funding-2014-IV, for example, composed of more than 100 pieces of loans to companies, including offshore drillers, sporting-goods stores, media outfits and airlines. Prospect in September wrote it down to 85% of its original $41.5 million face value. In new filings this week, the asset was further written down to 73% of face value."
"That would seem a substantial write-down, except that the same security took a bigger chop at one of Prospect’s peers, Eagle Point Credit Co. in Greenwich, Conn. That firm marked down its piece to 57% of the original $7 million face value. Eagle Point hasn’t updated its figures yet."
"The Securities and Exchange Commission recently began examining the values these firms put on some of their securities, according to people with knowledge of the fact-finding mission. Several shareholder lawsuits have been filed recently against some business-development companies raising questions about their valuations."
"Prospect pays itself fees of 2% of assets. It has an investment-grade credit rating, which is, in part, hinged to the value of its assets."
"CIFC Funding 2014-IV, the security that Prospect holds along with Eagle Point, is made up of hundreds of loans to companies, including energy companies Paragon Offshore PLC, Fieldwood Energy LLC and Seadrill Ltd. , according to a document reviewed by The Wall Street Journal. It also holds pieces of loans to United Airlines Inc. and other airlines as well as retailers including Party City Holdco Inc. and PetSmart Inc."
"Another CLO, called Halcyon Loan Advisors Funding 2014-2 Ltd., contains pieces of loans to energy companies, including Southcross Energy Partners, some technology companies such as BMC Software Finance Inc. and an array of other borrowers, including Sea World Parks & Recreation."
Critics said Prospect should have marked down the security more last year. “There is no way that there can be this much room between the two,” said Jonathan Bock, an analyst at Wells Fargo & Co. "If Prospect were to value its CLO portfolio similarly to other business-development companies, investors should have seen $250 million to $300 million in additional write-downs last year", he said.
FYI - SEC Said Examining How BDCs Value Securities - WSJ (PSEC) (ECC)
The SEC is examining how BDCs including Prospect Capital (NASDAQ: PSEC) value securities, according to the WSJ sources. A security called CIFC Funding-2014-IV was listed as an example. Other companies mentioned in the report include Eagle Point Credit Company Inc. (NYSE: ECC) and TICC Capital (NASDAQ: TICC).
Koleff - My offline subscribers are very happy and have avoided the money pits that you invest in as well as continually owning/buying BDCs that always top the charts for total return, beating the S&P 500 for two years now.
I realize that you do not care about capital losses but please understand that not all investors think the same way.
Koleff - If you don't want people looking you up, you shouldn't use your real name for posting comments.
BBP - I have been taking this much grief for three years from a f'ing chiropractor. Unreal.
Today, JP Morgan finally downgraded FSC and gave a price target of $6. Maybe they read my article from a few weeks ago? ;)
Robin - I almost didn't put HRZN in and it was just because they are also VC backed lenders. However, very different management style so not sure if I would actually include in higher quality. Nice catch.
I do not think all BDCs will trade at a premium to NAV - I think the ones that show quality governance could but right now there is still the yield curve battle along with fears of default increases. That will keep prices at a discount and I think management is okay with that as they can still work on portfolio maintenance and creating value in other ways like capital structure adjustments with share repurchases.
BHN - I too have a hard time understanding how investors can get excited about onetime income that beats estimates by $0.03 as a reason for celebration when the recurring interest income and NAV per share continue to fall.
Robin - The current price-to-NAV for most BDCs takes into account a deep recession and large amounts of defaults. It's completely overdone and fear is driving the prices.
Rose - I'm hoping to see some serious repurchases with PNNT.
So are you guessing 30 to 60 minutes of rally this morning or the full on two days and then back down? ;)
There are plenty of BDCs at discounts but the ones that are 40% or over are for a reason - many reasons. I think even activism will take a while for some of the larger mismanaged BDCs.
BBP - They used to let investors on the calls but I think they try to weed them out and make for analysts only as there was one call where it got out of hand with random people discussing fees.
Make sure you read the call from FSC yesterday when they discuss lack of share repurchases. PSEC will likely same the same thing this morning.
yblarr - I have the same issues with 10 BDCs, not just PSEC and I have spoken with various analysts that have talked with PSEC mgmt. and they basically say the same thing as they do on the investors calls. Analysts on the investors calls do not ask the tough questions anymore because they know they will the same answers as well.
PSEC mgmt is very set in what they will and will not do. Investors and analysts have no impact on the situation.
DJ - You should check your definition of share repurchases vs. insider buying. They are very different.
As for the SEC query, I have heard from multiple sources that this is a real issue and not going away. You can take the information from me a do what you want with it but please do not attack my integrity. Every opinion/statement I have made about PSEC has come true over the last three years.
Darnoc - Recession does not necessarily impact the values of loans unless the underlying credit of the portfolio company is impacted. However, spreads widening is often related to potential defaults or investors expecting higher yields, but this is more anticipated rather than actual fundamentals and I believe plenty of this already priced into loan values and BDC multiples. Then it becomes a question of how recession would actually impact a portfolio and BDCs with a quality credit platform should be better off. Basically, not a simple answer.
Sean - Where did you see that?
Robert - The percentage of NAV is standard for BDCs when looking at their "Schedule of Investments". Please see page 6 of the latest 10-Q for PSEC for an example of how BDCs report:
Robert - See my disclosure that mentions: "keep in mind that some of the positions are very small and mostly for research purposes."
BDD - I will have an article updating my thoughts on TPVG before they report (generally good).
clrod - Here you go and is updated for recent results from GBDC, PFLT, PNNT:
0.26 PFLT
0.28 TPVG
0.33 SLRC
0.46 FULL
0.48 BKCC
0.64 GSBD
0.64 TSLX
0.64 HRZN
0.69 ARCC
0.75 SUNS
0.75 TCRD
0.75 AINV
0.76 NMFC
0.77 MAIN
0.78 TCPC
0.78 FSIC
0.78 PSEC
0.82 HTGC
0.83 FDUS
0.89 FSC
0.93 PNNT
0.93 KCAP
0.98 TCAP
0.98 GLAD
0.99 GBDC
1.00 MCC
1.07 TICC
FYI - In a widening spread environment it is much better to have dry powder - for BDCs and for investors in BDCs.
Net investment income before capital gain incentive fee accrual per share was $0.32 which covers the dividend.
"Net investment income for the quarter ended December 31, 2015 excluding a $1.4 million accrual for the capital gain incentive fee under GAAP was $16.4 million, or $0.32 per share"
Five Plus - The article turned out great! Thank you for including me.
MCGC also wound down the portfolio.
"Innards" can be difficult for some of these as they are worth what someone else is willing to pay. However, cash is cash.
Very interesting stuff and I might refer to this article in upcoming. Thank you.
Looks like today is another bifurcation day.
I think investors are overreacting to the oil portion of the portfolio.
zucks - Thank you. All investors are different with various needs and I'm not the typical BDC investor simply looking for the highest yield.
As you pointed out, the charts are a general indicator that imply there was a good buying opportunity last week and we will probably see more. Investors should have their shopping list ready with BDCs that fit their profile.
Rose - Personally, I am staying away from adding to oil rich BDCs. If oil prices ever rebound PNNT would be a great buy. Also, it will be interesting to get an update from mgmt next week.
remix - GAIN was on my list to add and I respect the management but it does not have a high water mark fee structure which is what I am focused on adding to coverage.
Bart - I think we have had this discussion before but I would ask you not to share my offline thoughts in public comments such as these.