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My goal is to bring exposure to business development companies (BDCs) that finance small to medium sized businesses, typically overlooked by banks. BDCs are an instrument for investors to earn healthy dividends by avoiding double taxation at the corporate level and allowing income to flow... More
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BDC Buzz
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BDC Buzz
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  • BDC Buzz Report: 29 July 2013

    I took a break last week to prepare for the BDC earnings season that starts today and decided not to introduce the new picks for the 'General Optimal', 'Risk Averse' and 'Value & Growth' portfolios given the amount of changes expected from the financial results over the coming weeks. Also the FOMC announcement on July 31st could impact prices as it did after the last statement on June 19th sending BDC prices sharply lower and could potentially be another buying opportunity. BDCs more than recovered and it was a five day broad sell off of high-yield stocks and rate sensitive investments. However, if investors perceive the upcoming announcement as reassuring regarding future stimulus and low rates I would expect the opposite response and we could see BDCs as a group head higher.

    There was one change to the 'High-Yield' portfolio given the recent announcement from Solar Capital (NASDAQ:SLRC) to cut its dividend to a point that it is no longer 'high-yield'. Hopefully this will be a temporary rate reduction as SLRC realigns its investments with stronger portfolio income to support dividend increases. SLRC was ranked 3 out of 10 in the profitability category implying a potential risk to dividends and was the lowest allocation in the portfolio, but the rate reduction was still a surprise and it is the first in its three year history. Obviously there will be downgrades to projection and price targets in the coming days.

    BDCs that I follow reporting this week:

    • American Capital (NASDAQ:ACAS) on July 30th
    • MCG Capital (NASDAQ:MCGC) on July 30th
    • Solar Capital (SLRC) on July 31st
    • Solar Senior Capital (NASDAQ:SUNS) on July 31st
    • Gladstone Capital (NASDAQ:GLAD) on July 31st
    • Medley Capital (NYSE:MCC) on August 1st
    • Fidus Investment (NASDAQ:FDUS) on August 1st
    • BlackRock Kelso Capital (NASDAQ:BKCC) on August 1st
    • Hercules Technology Growth Capital (NYSE:HTGC) on August 1st
    • Keating Capital (KIPO) on July 29th (not part of the 25)

    The new 'BDC Buzz Report' is available at or if you would like to receive weekly email updates with price targets and rankings for each BDC please email me at and put "Subscribe" in the subject line and "Unsubscribe" to be taken off.

    Jul 29 8:12 AM | Link | Comment!
  • BDC Buzz Report: 14 July 2013

    The new 'BDC Buzz Report' is available at or if you would like to receive weekly email updates with price targets and rankings for each BDC please email me at and put "Subscribe" in the subject line and "Unsubscribe" to be taken off.

    I will no longer be posting weekly reports on this SA Instablog.

    Jul 14 6:32 AM | Link | Comment!
  • BDC Buzz Report: 7 July 2013
    If you would like to receive weekly email updates with price targets and rankings for each BDC please email me at and put "Subscribe" in the subject line.

    This Week Highlights:

    Profit Category Changes:

    Payout Category Changes:

    • Adjusted KCAP upward because the stock price dropped 7% and the dividend yield is now 10.7%.

    Analyst Category Upgrades & Downgrades:

    • Adjusted HTGC downward because was downgraded to Hold at Janney Montgomery Scott. Up 26% this year - and notably not getting caught up in June's income stock selloff - Hercules has surpassed the analyst's $13.50 price target.
    • Adjusted KCAP upward because Trading Central upgraded it from SELL to BUY.
    • Adjusted NMFC upward because Oppenheimer initiated coverage with a Outperform and price target of $15.

    Valuation Category Changes:

    • Adjusted KCAP and TCPC upward because they underperformed the other BDCs and became more favorable from a valuation stand point.
    • Adjusted FSC, SLRC, TCAP, AINV, PNNT, GBDC, HRZN, SUNS, BKCC, MCGC, and GLAD downward because they outperformed the other BDCs and became less favorable from a valuation stand point.

    Latest Articles:

    These are the five general criteria I use to evaluate BDCs:

    • Profitability (EPS to cover dividends, NAV and EPS growth)
    • Risk (rate sensitivity, diversification, portfolio quality, volatility)
    • Payout (sustainable, consistent, growing)
    • Analyst Opinions
    • Valuation (NAV, P/E, PEG)

    Below is an oversimplified table with rankings between 0 and 10 (10 being the best) relative to the 25 BDCs I have reviewed (The Good, The Bad, and The Maybe). Investors should only use the following information as a starting point for due diligence. In reality I use different weightings for almost 100 data points on each company and my personal rankings (based on my risk/return comfort) are close to these but far from exact. Investors should weight each category based on their investment needs for example if risk is more important than dividend yield then a BDC like MAIN would be good, etc. Also keep in mind that each category takes many things into account like the payout is more than just dividend yield and includes historical dividend growth and sustainability through coverage from net investment income.

    The tables below do not actually contain whole numbers and the totals might different (by 1) due to rounding:

    (click to enlarge)

    In a recent series of articles "BDC Risk Profiles" I took an in-depth look at the relative risk levels of each BDC. Specifically, I looked at portfolio credit quality, investment asset classes, diversification, non-accrual rates, portfolio yield, fixed/variable rate loans, leverage, interest rate sensitivity, volatility ratios, market capitalization, insider ownership and trends, institutional ownership and trends, and management/operational history for each BDC. I then used various weightings to come up with an overall relative risk rank and compared the pricing multiples of NAV and EPS for each. I believe there is a strong correlation between investors perception of risk and the valuation multiples they pay. The table below breaks down the BDCs into groups with associated multiples:

    • For charts please email me at and put "Subscribe" in the subject line.

    I have included the price to 2013 EPS (FWD P/E) estimates which are very close to the multiples for LTM EPS.

    Currently the average NAV multiple is 1.06 (excluding ACAS as an outlier) and P/E multiple is 11.0 using LTM EPS (with the exception PSEC which I normalized for impacts from the Gas Solutions sale). The 'standard deviation' statistically measures the variation of pricing compared to the average, with 68% of BDCs priced within one standard deviation from the average or between 0.93 and 1.19 times NAV and between 9.2 and 12.7 times LTM EPS.

    Ideally, each BDC would be priced along a valuation curve with investors paying a premium for favorable risk to reward ratios. The chart below attempts price each BDC based on risk levels using the current averages and standard deviation of multiples. Keep in mind that these multiples can change at any time and are just averages of what people are currently paying.

    • For charts please email me at and put "Subscribe" in the subject line.

    This pricing methodology would imply that some BDCs are undervalued and overvalued, but also shows that 11 of the 25 BDCs I cover are priced within 10% of the implied pricing.

    The only change to the top and bottom 5 was PSEC replaced ACAS as being valued slightly more favorable.

    Five most undervalued BDCs:

    • FSC
    • TCPC
    • MCC
    • TICC
    • PSEC

    Five most overvalued BDCs:

    • KCAP
    • HTGC
    • MCGC
    • TCAP
    • MAIN

    Disclosure: I am long TCPC, MAIN.

    Jul 07 2:08 AM | Link | Comment!
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