BDC Review

BDC Review
Contributor since: 2011
Brad - I wrote an article that covered the returns via DRIP for REITs. It has been a great trade for the past few years
I agree a lot of these BDCs are trading over NAV and it will be interesting to see which one has the next secondary.
Hello BigB - I reviewed ARCC's Q3 and Nicholas Marshi included a great comment on some concerns with them -
With that said, I firmly believe in the ARCC management team and will try to evaluate them again after the next round of earnings
GlowWorm - being long since 2009 for most securities would be good. I believe in PSEC enough to keep them as a "HOLD" but I do not plan on adding any additional shares. My current favorite BDC is TCAP, but I believe they may be tapped out in terms of capital gains.
The main reason to wait for the secondary and to buy at the drop is that if you buy today at $11.19 and the secondary offering is within a month, the potential drop (5-10%) would eliminate any gains you have by holding onto the stock for that time.
As I said before, there are a few other reasons to sit on the sideline with this stock and as I mentioned in another article in 2011 (dated but still applies), PSEC does not sit above book for long -
I believe the secondary will be in January if the earnings report is not as positive OR it will be in early February right after the release.
I sold out of BKCC and FSC last year as I believe they have some issues. I am hesitant to add any additional equity exposure until the debt ceiling/sequestration are worked out. I will be posting an article after the Q4 10Qs are released rating the best/worst BDCs for the year.
As the next commenter pointed out - there is no way to predict the future. A capital loss now IS worth more if you are willing to sell it Jan 2 and have a gain you also wish to cover. However, "holding" losses should only be done if you have done some research (or read credible other research) and believe the stock is still a good fit for your portfolio
Thanks for the comment BarnDerk. MSB will be an interesting one and it is possible GNI could end up with a higher residual. Should be interesting once the year ends and they update their NAV.
Exactly Brian - the main reason I wrote this post was so I could prove to myself that trying to gain a few points of tax alpha these last few weeks of 2012 would not be worth it.
Thanks for the write up Nicholas! Anyone who is looking into ARCC should make sure to read this comment.
Hello Robin - the FirstLight portfolio was an example of Ares taking over the management of the existing mess. They did not create the Leverage^Leverage company, but they did help fund it. The people who were running FirstLight are not the same people that run ARCC. In the CC, they mentioned that leverage levels are rising again but they are focusing on keeping their investments to a 4.5 to 5 level. When we see them investing in company's at a 7x EBITDA purchase price, then there is concern.
Curious question - why do you feel the offering could be within the next two weeks (before year end) ?
Hello TwistTie,
Thank you for reading. ARCC has been a huge player in the Business Development sector since the Great Recession. For more articles on them, please click into my history or check out articles from Nicholas Marshi.
The next benchmark for this company's value will be their 10-K. This should provide all of the detail we need as far as estimating a final payout.
A Moody's downgrade would be bad as two out of the three major agencies will have the US no longer AAA. This will blow up some CLO/CDO/guidelines as they scramble to get a higher average quality score in their funds.
This is true C Corps can (and do) pay a dividend, but the incentive as a C-Corp is there to retain earnings. Also, I should have clarified in my article that given the sizable tax asset, they will not be converting back into a BDC anytime soon and have no reason to pay dividends outside of shareholder angst.
cgm - My main concern is that they grew NAV via an accounting change and not an organic change. They are definitely rebuilding the business but it may make more sense to view (and value) ACAS as an investment manager going forward and not as a BDC.
Two year is a long time but, would you rather invest in a stock that is a going concern or one with a set end-date? It may make more sense to put that money into a municipal bond fund.
NWI - Insiders will always know more about the stock than us. Also, AGNC is basically a hedge fund for American Capital so of course they want to increase AUM. As long as they are making money for shareholders though, everyone is happy.
Nice article - I have run two studies on Dividend Reinvestment for BDC and REIT companies. You can view the article here:
Just saw this question after a year - the current debt level is important, but I believe "available debt capacity" is more important. It shows how much additional availability a firm has to make an investment if the proper opportunity arises.
raosborne - There are multiple ways to evaluate it. Hopefully my explanation was detailed enough so other readers can learn from it.
Good job staying on top of your security and selling at the right time. I wonder if there are any other Trusts like this one set to expire.
Great discussion!
If the yield curve inverts OR if the fed suddenly raises interest rates, mReits would suffer. They would have reduced net interest spread and a raise in rates would also cause the market value of their holdings drop due to duration.
The US Government has it:
m = Mortgage, usually US Gov't Agency mortgages.
I would consider reducing/selling out when the yield curve starts to flatten/invert OR when you decide they are no longer a good match for your portfolio.
Again for a primer on how AGNC's spread trade works, please check out my article on this -
Hello David - I made that mistake while typing the article. The inception date from my mini-chart is correct, I must have just mixed up the symbols. It should be corrected soon.
Thanks for reading
Guardian - I am going to update my post from last year when I ranked the BDCs and show a year over year change. I think there is still some room in the BDC space especially for the companies that can keep the margins high on new investments.
pokerman - They were previously paying out $1.4/share. AGNC has done a good job of matching their dividend with their earnings so far so I would not be as focused on the raise as much as their net interest margin. I posted an article on this just recently, let me know if you think I missed anything.
TCAP has been a top-performing BDC. I wonder when they are having their next equity raise.
I agree that diversification is great. I also believe that anytime leverage is employed things tend to "blow up" at the end.
However, doubling down on the dividends has been successful for CMO and NLY. Those two have been around through the dot-com and Great Recession. Evaluating a company based on management may be more appropriate rather than lumping all REITs together.