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  • Why BlackRock Kelso Capital Had A Disappointing First Quarter [View article]
    In a real world sense, "The Street" was wrong. In the GAPP sense, "The Street" was right. It was the "Net Increase in Net Assets Resulting from Operations" that was $29.797 million or $0.4049/share. For BDCs, it is Net Investment Income that needs to cover the dividend. And it was Net Investment Income that was projected to be twenty-seven.

    In a GAAP sense, the "Net Increase in Net Assets Resulting from Operations" is EPS. But just like REITs, the EPS "projections" one can find at the financial web sites under EPS label are really FFO projections. And the BDC EPS projections are really NII projections.

    Use the analogy of REITs. A REIT needs to cover its dividend with FAD, CAD or AFFO. But REITS still have an EPS. Or use the analogy of MLPs, which needs to cover its dividend with DCF - while they still report an EPS.
    May 7, 2013. 09:06 AM | Likes Like |Link to Comment
  • An Intensive Look At BlackRock Kelso Capital Leads To Doubts [View article]
    BDCs primarily own debt - and inflation is bad news for holders of IOUs. The BDCs have mentioned in their conference calls that they are "Goldilocks" stocks - they like an environment that is not too hot and not too cool. But . . . .

    BDCs own fixed rate debt, floating rate debt and equity. And they own them in different mixes. They have different mixes when it comes to debt maturities. And portfolio turn also happens at different rates. So there is no one size fits all answer..

    Inflation should also mean a good US economy. A good economy should result in fewer non-accruals.

    A concern about inflation is another reason to like high dividend CAGR BDCs. Stocks that have the faster rate of increase in their dividends will do better in a higher inflation environment than stocks with slower growth or no growth in the dividend.
    Mar 24, 2013. 10:12 AM | 1 Like Like |Link to Comment
  • Valuations Tell Me To Pass On BlackRock Kelso Capital [View article]
    On the one hand, KCAP has a growing NII/share; a very good NII/TII ratio; and a covered dividend that may have some opportunity to grow. On the other hand, KCAP generates over 50% of its TII from CLOs. That is a big concern to me. I would score KCAP high on the yield plus CAGR scale - but it comes with too much risk for my liking.

    You do not own a single BDC with LTM (last twelve month) NAV growth. Even including AINV - there is no NAV growth

    I think more in terms of portfolios than in terms of individual investments. And one would need to give out way too much information in a public forum before I would feel comfortable giving advice. I own some risky investments in small doses. I even have one or two "yield hog" investments. But in total, I have a well diversified portfolio of individual stocks and bond mutual funds [which I call my total income portfolio] that generates a 4.37% yield and a 5.71% dividend and distribution CAGR projection..(My weighting in bonds and REITs really hurts my portfolio "yield plus CAGR".)

    If your total portfolio is lacking in the CAGR attribute, then you have a bad BDC portfolio if you own BKCC and KCAP. But if you have a good portfolio CAGR and a diversified and low risk portfolio, then you will do OK with those two.

    And now for the really bad news.
    (1) Even giving this skimpy level of advice violates my mantra of "do the due diligence that but you in control of investment decisions. Do not lean on borrowed opinions." You can borrow my numbers. You can adopt my valuation theories. But do not lean on any opinion - even my opinion. .
    (2) Your three BDC purchases indicate that you lack CAGR awareness. It takes time, effort and conviction to build CAGR awareness. If my diagnosis is correct (look at your portfolio CAGR for confirmation) - start to correct that deficiency ASAP.
    Mar 23, 2013. 08:13 PM | 1 Like Like |Link to Comment
  • Valuations Tell Me To Pass On BlackRock Kelso Capital [View article]
    Richhoy403 wrote " am a little confused about paragraph 4 ("Let us talk about risk") and immediately discusses the EPS projection",

    Dang it! Why can't you guys get confused about something simple {grin}

    Risk and EPS projections
    Two indicators of risk are found in the EPS projections. Historical EPS accuracy tracks the comparison between beginning of the year consensus EPS projection and the end of the year actual EPS. This tracking is done year after year. Higher risk equities have higher EPS volatility or a lack of accuracy. Lower risk equities have greater accuracy.

    There is a very good correlation between EPS historical accuracy and credit ratings. You could even call it a redundant risk indicator. But in the sectors where I invest, there are smaller stocks that fail to go to the expense of paying for a rating for their publicly traded debt. Some BDCs do not even have publicly traded debt. So tracking this risk indicative metric provides a similar risk measure for non-debt rated stocks.

    This measure was discovered by accident. I wanted to track if some stocks over promised and under delivered. I thought that attribute would be tracked by measuring the change in the EPS projection over a twelve month period for s few years. After several years of gathering the stats - I failed to see an “over promise” indicator. But I did see higher volatility on some stocks than others.

    The specific sector where this was first tracked was MLPs. The large cap midstream stocks had low volatility. The smaller cap gathering and processing MLPs and E&P MLPs had higher volatility. The midstream stocks have different business models. A larger fee for service component goes into their EBITDAs. The more commodity sensitive business models had higher EPS projection volatility.

    The second risk indicator is found in the spreads between the current year high and low projection. The higher the spread, the more uncertainty there is about the EPS projection. This also correlated to MLPs and their business models. It also works in other sectors. There is less than 100% correlation between this risk indicator and the historical EPS indicator - but the correlation is strong. And this indicator is present in stocks that do not have several years of historical EPS accuracy in which to base a risk measure on that attribute.

    There is a significant potential for risk perception to be subjective and inconsistent implemented across all the stocks in a sector. For example, if someone is comparing stock ABC to stock XYZ, if ABC has cut its dividend while XYZ has not, there would be a personal bias for me to call ABC a riskier stock. And I would have a personal bias to weight this one attribute heavily.

    The generation of a risk assessment system that has multiple metric inputs that can be objectively and consistently applied is a large step away from being subjective and inconsistent. For those of us who Dividend Discount Model, a quality RRR (required rate of return) assignment is critical.
    Mar 23, 2013. 11:02 AM | 5 Likes Like |Link to Comment
  • Valuations Tell Me To Pass On BlackRock Kelso Capital [View article]
    There are BDCs that disclose their percentage of debt securities that have floating rates - and some of those floating rate loans have LIBOR floors. BKCC did not disclose their fixed vs. floating percentages in Q4-12.
    Mar 23, 2013. 08:58 AM | Likes Like |Link to Comment
  • Valuations Tell Me To Pass On BlackRock Kelso Capital [View article]
    My focus is on "yield plus dividend CAGR". Most brokerages produce dividend CAGR projections. Value Line is another source.

    In other sectors, I have more of a focus on generating a consensus analyst CAGR projection that is in alignment with other metrics. With BDCs, I am not finding believable dividend CAGR projections from the brokerages. Some brokerages fail to produce their projections. Other brokerages produce overly optimistic projections.

    Yield is a bird in the hand. CAGR is like the two birds in a bush. CAGR sells at a discount. That discount is logical. And 'buying' that discount is where I believe superior (or sector beating) returns can be produced.

    Yes - this line of thinking is transferable to C crops. I use "yield plus CAGR" - with adjustments for risk - in my spreadsheets that I produce for regional banks, REITs, consumer staples, dividend paying tech and industrial stocks. I also focus on "yield plus CAGR".for MLPs (energy Master Limited Partnerships)..

    The 10% to 12% standard may duplicate standards developed by others. I use it because that is where I am finding the better investments. CAGR projections are fragile - and changes in CAGR perceptions has a very strong correlation to price changes. When you find stocks with higher yield plus CAGRs, it is only due to the CAGR being sky high. I am lighted invested in some of those stocks.
    Mar 22, 2013. 04:12 PM | 2 Likes Like |Link to Comment
  • Valuations Tell Me To Pass On BlackRock Kelso Capital [View article]
    The first spreadsheet shows LTM (last twelve months) dividend growth for each BDC. Several BDCs are growing their dividends. The BDC equity investments can grow in share price - and that grows the NAV/share. The retention of NII for BDCs that have well covered dividends will also increase the NAV. Bonds and notes purchased at a discount can grow the NAV. As NAV/share grows, the income/share that supports the dividend will grow.
    Mar 22, 2013. 03:39 PM | 3 Likes Like |Link to Comment
  • An Intensive Look At BlackRock Kelso Capital Leads To Doubts [View article]
    Many BDCs have non-accrual rates that are lower than banks. Some of the BDCs did not cut their dividends during the great recession. And BDCs tend to be conservatively leveraged. Based on those three metrics - SOME of the BDCs are not that risky.

    As to the large standard of deviation in NII/TII ratios - instead of disliking that whole sector, why not be interested in those BDCs that have the good ratios? I expect to continue to update one or two per week - but one can do this simple math on their own to get that data. I should get around to posting the sector data on that attribute in about two weeks.

    One note on terminology - BDCs are business development companies while BDCS is one of the sector ETFs [Exchange Traded Funds] for business development companies.
    Mar 21, 2013. 08:10 PM | 1 Like Like |Link to Comment
  • An Intensive Look At BlackRock Kelso Capital Leads To Doubts [View article]
    There was a line item that I neglected to include in my post. The Q4-12 base management fee was $5.627 million ( $0.0762/share). This line needs to be added to incentive fees to find total management compensation.

    Fourth quarters are very fee intensive for BKCC - and the other quarter's are light. This happens year after year.

    My focus in on the NII/TII ratios - which is a metric that includes management fees. The average BDC had a 56% ratio in Q3-12 [an average which had a high standard of deviation]; 59% in Q2-12; and 58% in Q1-12. For the full year 2012, BKCC had a 50% NII/TII ratio. There are lots of BDCs that did a worse job at getting NII out of TII. 15 out of 29 of the BDCs in my "full data set" (newbies are not included in the full data set) had NII/TII ratios under 50% in Q3-12.
    Mar 21, 2013. 04:29 PM | 3 Likes Like |Link to Comment
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