Why OFS Capital Was Downgraded By Oppenheimer [View instapost]
Hard to determine if OFS price has bottomed out. We bought more on the way down so that means the stock will drop further ! The issues that need to be resolved, including the full capture of the SBIC license, will take weeks or months to fully resolve so the price could be in limbo for awhile.
We read the 10-Q in some detail, and made a number of assumptions (the SBIC "drop-down" would be/would not be approved) and sought to calculate out the pro-forma earnings accordingly as all the capital available to OFS is deployed. The good news is that even if OFS is stymied, and can only invest $25mn as an investor in the SBIC, the Company will still be generating a decent profit (albeit at a lower level than anticipated by the level of the dividend) . Moreover, management will have the option to invest capital in higher yielding investments going forward, and/or raise "baby bonds" instead of SBIC debt. In such a fluid situation with so many alternatives available to OFS there's no point in trying to predict what management's exact steps might be. Still, with $142mn in GAAP equity, we'd be surprised if OFS could not earn an 8% NOI, or $11.4mn, or $1.18. That would suggest at today's price OFS could pay a dividend yielding 9.5%-10.0%. Of course, if everything goes as originally planned earnings could be substantially higher.
We like special situations with limited downside and a greater degree of upside, and that seems to apply in this situation.
Prospect Capital's Foray Into Real Estate [View instapost]
All prospective investments (no pun intended) haves pluses and negatives.( Even those companies which, on a relative basis, have less "issues" most likely will be over-priced). From our perspective, we want to be realistic about assessing each investment we make and the risks and upsides we are facing, rather than unreservedly "falling in love" with a stock.
You may be asking me the question as an existing investor in Prospect irked that I have said something critical of your stock but I don't see Seeking Alpha as a fan page for stocks but a place to provide a balanced view. Don't you think it's interesting that a BDC is building out a Real Estate Investment Trust from scratch ?
Goldman Sachs Jumps Into The Business Development Arena [View article]
Small pedantic correction: KKR does not have a BDC affiliate ( but Apollo Global Management does in Apollo Investment). You may be thinking of KKR Financial LLC (KFN) which has been around since 2004 and provides debt financing to buy-outs and pays a regular dividend. However KFN is not regulated as a BDC and can take on more leverage ( where a BDC is limited to debt to equity to 1:1) and can choose to retain earnings (where a BDC cannot).
As for the Goldman BDC, we don't expect much. Middle market lending is not the firm's expertise and the commitment so far, in terms of capital and asset size, has been very modest. This appears to be more of a toe in the water than a major move. We doubt Goldman will be a top ten player in the BDC space even a year out.
Prospect Capital: Is It Better Than American Capital? [View article]
I'll weigh in, but from memory: ACAS is still a BDC but has elected C Corp status.to take advantage of all it's losses. Nonetheless, I treat ACAS as an asset manager, rather than a BDC.
Fight The Fed: 5 BDCs Yielding Nearly 10% With Safety Limits [View article]
No. All the BDC Notes (there are over 20 issues now !) are fixed rate. That's the benefit to the BDC: fixing their liability cost at historically low levels. The maturity of the Notes vary from 6 years to 30 years plus, but most are ten years and under. Most pay interest quarterly and a few month monthly (GLADP, GAINP and OXLCP are Yahoo tickers).
For an investor the longer term maturity adds interest rate risk to the normal credit risk calculation.
Fight The Fed: 5 BDCs Yielding Nearly 10% With Safety Limits [View article]
Goldman is not a middle market player, nor a renowned lender, so the new BDC is a very interesting development and not necessarily going to end well. Agree with CorvetteKid that their huge earnings are unlikely to be much affected by the contribution from a BDC. Looking forward (if that's the right way term) to reading the Prospectus.
Fight The Fed: 5 BDCs Yielding Nearly 10% With Safety Limits [View article]
To Guardian3981: Agree that prices for BDCs are high (which might account for profit taking today). Our own analysis sees a 7% further upside on the 36 companies we track.
However, don't count on IPOs making much of a difference as a competitive capital source. Very, very few of the private companies financed by BDCs ever go public (exception are the technology BDCs): too small and insufficient growth (remember BDCs like companies with consistent, predictable cash flows. The IPO markets want fast growth companies).
As for banks, there's no sign of increasing competition from them. The new Basel rules make direct leveraged lending (as opposed to underwriting and syndicating) unattractive from a capital adequacy standpoint. Competition is coming from finance companies (like CIT), CLOs (but only for bigger transactions), the junk bond market (but only at the very largest companies), and other BDCs. Still, a review of the fourth quarter 2012 BDC filings shows that most of the lower mid market and middle market BDCs were not seeing much in yield erosion on new loans. The situation is different for the larger BDCs which have to compete with junk bonds and CLOs.
I'd stick my neck out and say that BDCs in the years ahead, because of their deal networks, access to low priced public capital and blue chip sponsorship, will increasingly dominate the market for providing senior, subordinated and uni-tranche lending to smaller and mid-sized buyouts. Maybe that explains Goldman joining the party with their own BDC.
Fight The Fed: 5 BDCs Yielding Nearly 10% With Safety Limits [View article]
To Guardian3981: Agree that prices for BDCs are high (which might account for profit taking today). Our own analysis sees a 7% further upside on the 36 companies we track.
However, don't count on IPOs making much of a difference as a competitive capital source. Very, very few of the private companies financed by BDCs ever go public (exception are the technology BDCs): too small and insufficient growth (remember BDCs like companies with consistent, predictable cash flows. The IPO markets want fast growth companies).
As for banks, there's no sign of increasing competition from them. The new Basel rules make direct leveraged lending (as opposed to underwriting and syndicating) unattractive from a capital adequacy standpoint. Competition is coming from finance companies (like CIT), CLOs (but only for bigger transactions), the junk bond market (but only at the very largest companies), and other BDCs. Still, a review of the fourth quarter 2012 BDC filings shows that most of the lower mid market and middle market BDCs were not seeing much in yield erosion on new loans. The situation is different for the larger BDCs which have to compete with junk bonds and CLOs.
I'd stick my neck out and say that BDCs in the years ahead, because of their deal networks, access to low priced public capital and blue chip sponsorship, will increasingly dominate the market for providing senior, subordinated and uni-tranche lending to smaller and mid-sized buyouts. Maybe that explains Goldman joining the party with their own BDC.
Fight The Fed: 5 BDCs Yielding Nearly 10% With Safety Limits [View article]
Very interesting article, with a great deal of data not seen before. However, I have to disagree about a couple of key points. First of all, yield does not equate to risk. Yes, I know it's an easy rule of thumb, but the facts do not support the contention ( if only it were that simple...). For example, back in the glory days before the Great Recession TICC Capital was making "senior loans" to technology companies at very low rates because the sector was very competitive,with many bankers making aggressive loans to gain relationships with these growing businesses. In 2007 and 2008 many of those loans defaulted in a very brief period and TICC generally lost 100 cents on the dollar. The moral is that yields vary by sector and size segment (liquidity as much as credit risk affect yield, as well as cost of sourcing/managing loans). Today, the larger cap BDCs yields are being squeezed ,while the risks they are taking are going up because they compete with the junk bond and CLO markets. Is a loan made by Main Street Capital or Triangle Capital or Fidus Investment made to a lower mid market borrower at a double digit yield riskier than a so called senior loan made by Ares Capital or Apollo when the average leverage on the former is half or one third lower than the latter? Certainly, as your own analysis of PNNT shows, the loss data does not suggest the lower mid market BDCs with the higher yields have the greatest losses.
Secondly, you have to look beyond the loans themselves and at the structures that BDCs have used to determine risk in the next recession. A number of BDCs, eager to reduce their debt cost of capital, have raised money by using structures which may come back to bite them in the future. Although I am currently long both TICC and GBDC, I am worried about their use of CLO vehicles to fund a portion of their portfolios. The BDC raises cheap senior money from the CLO and invests their capital in the most junior segment of the vehicle. This allows the BDC to garner the difference in yield between the loan portfolio and the rated senior portion of the CLO. However, when the next recession comes along, the very real risk is that defaults will cause the structure to channel all interest and principal repayments to the senior CLO tranche holders until repaid or default cured, and nothing to the BDC equity holder. That will put the kibosh on BDC dividends for an extended period, and raises the possibility of major losses ( CLOs are leveraged 8-14 times).
Look also at the increasing prevalence of loans made by BDCs with first loss provisions ( Ares, Apollo and Fifth Street have done them, as has Gladstone investment if memory is correct). That's when the BDC will share a loan with another borrower, but for a higher yield will agree to absorb any initial credit loss should one occur.
All the above and many other credit subtleties make evaluating BDC portfolios very difficult. My concern is that the institutional investors who own much of the stock of BDCs will not bother, and just move very quickly out of the sector when the credit and economic environment darken. Although BDC capital structures are far stronger than in 2008-2009 as you mention, stock price volatility may still be very high.
23 BDCs - The Good, The Bad And The Maybe? Part 19: Full Circle Capital [View article]
We recently took Full Circle off our internal Buy List for many of the reasons listed in your article: ever reducing NAV, small size and low trading volume. We are not yet convinced by the first two years of performance and the historic data provided in the initial prospectus that FULL's strategy of asset based lending will provide the lower net losses on bad debts that the Company suggests will be the case. Furthermore, FULL does not seem to have a formula for capturing equity gains from it's investments to offset the NAV erosion from bad loans in the same way that Triangle Capital, Main Street Capital or Prospect Capital do.
Given the above, and the reliance for debt funding on a short term (very expensive) Revolver, we are worried that in a prospective recession a deteriorating portfolio could lead to a default under the Revolver and a forced de-leveraging in order to repay the lender.
If FULL can arrange long term capital from the SBIC or some other source ( maybe Russia, I hear they're lending) , increase it's portfolio diversification and demonstrate that non performing loan losses can be contained or offset by capital gains we will have a second look.
18 BDCs - The Good, The Bad And The Maybe? Part 14: TICC Capital [View article]
The good news about TICC's approach to equity raising is that the Company has a track record of getting the funds invested very quickly. We'd guess the latest capital will be effectively invested in a month, and earning income for the shareholders. Compare that to Fifth Street Finance (FSC) which has been under-leveraged and over-capitalized (in the view of many analysts) for many quarters.
18 BDCs - The Good, The Bad And The Maybe? Part 14: TICC Capital [View article]
Great article about TICC. If you want exposure to CLO investments (not that anybody seems to on this page) look at little known BDC Oxford Lane Capital (OXLC), managed by the same folks who brought you TICC Capital (they know CLOs). Pays the highest dividend yield of any BDC because the investments are in the bottom of the highly leveraged CLO structures. On the other hand, after much hand wringing about massive losses to come in 2008-2009 about CLOs, and many parties selling out at massive discounts, the actual losses have been very,very low. Which accounts for the enormous popularity of the structure this time round from institutions (most retail investors don't understand them and don't want to) and the huge amount of CLO issuance going on. Ares recently launched a Closed End Fund (ARDC) which includes CLO assets as one of their three target debt classes along with Floating Rate Loans and High Yield Bonds. Read their prospectus for the arguments for having CLO exposure.
The Inflation Investment You've Never Heard Of [View article]
The best way to invest in Senior Secured Floating Rate Loans is in the two ETFS that exist, with tickets BKLN and SNLN. (The former is the granddaddy of the sector, with many more assets but the underlying index is essentially the same). Otherwise, the other way to invest in this trillion dollar asset class is to invest through a Closed End Fund. That usually involves the use of leverage by the manager (typically a third of assets are borrowing financed) which increases returns, but also volatility ( changing the Sharpe and other ratios mentioned in the excellent article above). There are several dozen CEFs to choose from, some which ave been around for many years ( this is a sector with a history of public investments that goes back more than twenty years,through many cycles). Go to http://bit.ly/o4ngfR for copious information about all the players.
Solar Capital: BDCs - The Good, The Bad And The Maybe? Part 5 [View article]
Just wanted to add a couple of points to the above.
1. Didn't want to give the impression that we are negative about SLRC in the short run. We are Long the stock right now. However, we do keep our finger on the trigger where this name is concerned more than certain others (like TCAP for example) because of the reasons given.
2. We were intrigued by the Crystal Financial acquisition, which we've written about, but we need to know more. There is a trend going on amidst many of the larger cap BDCs, which we call "style shift". BDCs are partly moving away from their traditional lending targets to maintain yields. For example, Ares Capital is committing one fifth of it's assets to a JV with GE Capital where they serve as the "first loss"partner. Moreover, the Company is getting into venture debt investing and other new sectors. Apollo Investment has begun investing in CLOs (years after that market was a great value but that's another issue). Also AINV is also investing in a "first loss" structure with Madison Capital, which is invested in secured loans (a new area for Apollo). AINV is also branching out into airplane leasing and energy financing. American Capital is getting into infrastructure financing. Prospect Capital is investing in consumer debt. Here's an example from their Earnings Release:
"On December 28, 2012, we completed a $47.9 million debt and equity recapitalization of Credit Central Holdings, LLC ("Credit Central") a branch-based provider of installment loans. Through the recapitalization, we acquired a controlling interest in Credit Central for $38.1 million in cash and 897,906 unregistered shares of our common stock."
Is Solar Capital re-inventing itself as well, or is it a one off ? The earnings Conference Call is coming up on Tuesday, and should be worth a listen.
Why OFS Capital Was Downgraded By Oppenheimer [View instapost]
We read the 10-Q in some detail, and made a number of assumptions (the SBIC "drop-down" would be/would not be approved) and sought to calculate out the pro-forma earnings accordingly as all the capital available to OFS is deployed. The good news is that even if OFS is stymied, and can only invest $25mn as an investor in the SBIC, the Company will still be generating a decent profit (albeit at a lower level than anticipated by the level of the dividend) . Moreover, management will have the option to invest capital in higher yielding investments going forward, and/or raise "baby bonds" instead of SBIC debt. In such a fluid situation with so many alternatives available to OFS there's no point in trying to predict what management's exact steps might be. Still, with $142mn in GAAP equity, we'd be surprised if OFS could not earn an 8% NOI, or $11.4mn, or $1.18. That would suggest at today's price OFS could pay a dividend yielding 9.5%-10.0%. Of course, if everything goes as originally planned earnings could be substantially higher.
We like special situations with limited downside and a greater degree of upside, and that seems to apply in this situation.
Prospect Capital's Foray Into Real Estate [View instapost]
You may be asking me the question as an existing investor in Prospect irked that I have said something critical of your stock but I don't see Seeking Alpha as a fan page for stocks but a place to provide a balanced view. Don't you think it's interesting that a BDC is building out a Real Estate Investment Trust from scratch ?
Fifth Street Finance Corp.'s Upcoming Q2 2013 Income Statement Estimation [View article]
Goldman Sachs Jumps Into The Business Development Arena [View article]
As for the Goldman BDC, we don't expect much. Middle market lending is not the firm's expertise and the commitment so far, in terms of capital and asset size, has been very modest. This appears to be more of a toe in the water than a major move. We doubt Goldman will be a top ten player in the BDC space even a year out.
Prospect Capital: Is It Better Than American Capital? [View article]
Fight The Fed: 5 BDCs Yielding Nearly 10% With Safety Limits [View article]
For an investor the longer term maturity adds interest rate risk to the normal credit risk calculation.
Fight The Fed: 5 BDCs Yielding Nearly 10% With Safety Limits [View article]
Fight The Fed: 5 BDCs Yielding Nearly 10% With Safety Limits [View article]
However, don't count on IPOs making much of a difference as a competitive capital source. Very, very few of the private companies financed by BDCs ever go public (exception are the technology BDCs): too small and insufficient growth (remember BDCs like companies with consistent, predictable cash flows. The IPO markets want fast growth companies).
As for banks, there's no sign of increasing competition from them. The new Basel rules make direct leveraged lending (as opposed to underwriting and syndicating) unattractive from a capital adequacy standpoint. Competition is coming from finance companies (like CIT), CLOs (but only for bigger transactions), the junk bond market (but only at the very largest companies), and other BDCs. Still, a review of the fourth quarter 2012 BDC filings shows that most of the lower mid market and middle market BDCs were not seeing much in yield erosion on new loans. The situation is different for the larger BDCs which have to compete with junk bonds and CLOs.
I'd stick my neck out and say that BDCs in the years ahead, because of their deal networks, access to low priced public capital and blue chip sponsorship, will increasingly dominate the market for providing senior, subordinated and uni-tranche lending to smaller and mid-sized buyouts. Maybe that explains Goldman joining the party with their own BDC.
Fight The Fed: 5 BDCs Yielding Nearly 10% With Safety Limits [View article]
However, don't count on IPOs making much of a difference as a competitive capital source. Very, very few of the private companies financed by BDCs ever go public (exception are the technology BDCs): too small and insufficient growth (remember BDCs like companies with consistent, predictable cash flows. The IPO markets want fast growth companies).
As for banks, there's no sign of increasing competition from them. The new Basel rules make direct leveraged lending (as opposed to underwriting and syndicating) unattractive from a capital adequacy standpoint. Competition is coming from finance companies (like CIT), CLOs (but only for bigger transactions), the junk bond market (but only at the very largest companies), and other BDCs. Still, a review of the fourth quarter 2012 BDC filings shows that most of the lower mid market and middle market BDCs were not seeing much in yield erosion on new loans. The situation is different for the larger BDCs which have to compete with junk bonds and CLOs.
I'd stick my neck out and say that BDCs in the years ahead, because of their deal networks, access to low priced public capital and blue chip sponsorship, will increasingly dominate the market for providing senior, subordinated and uni-tranche lending to smaller and mid-sized buyouts. Maybe that explains Goldman joining the party with their own BDC.
Fight The Fed: 5 BDCs Yielding Nearly 10% With Safety Limits [View article]
Secondly, you have to look beyond the loans themselves and at the structures that BDCs have used to determine risk in the next recession. A number of BDCs, eager to reduce their debt cost of capital, have raised money by using structures which may come back to bite them in the future. Although I am currently long both TICC and GBDC, I am worried about their use of CLO vehicles to fund a portion of their portfolios. The BDC raises cheap senior money from the CLO and invests their capital in the most junior segment of the vehicle. This allows the BDC to garner the difference in yield between the loan portfolio and the rated senior portion of the CLO. However, when the next recession comes along, the very real risk is that defaults will cause the structure to channel all interest and principal repayments to the senior CLO tranche holders until repaid or default cured, and nothing to the BDC equity holder. That will put the kibosh on BDC dividends for an extended period, and raises the possibility of major losses ( CLOs are leveraged 8-14 times).
Look also at the increasing prevalence of loans made by BDCs with first loss provisions ( Ares, Apollo and Fifth Street have done them, as has Gladstone investment if memory is correct). That's when the BDC will share a loan with another borrower, but for a higher yield will agree to absorb any initial credit loss should one occur.
All the above and many other credit subtleties make evaluating BDC portfolios very difficult. My concern is that the institutional investors who own much of the stock of BDCs will not bother, and just move very quickly out of the sector when the credit and economic environment darken. Although BDC capital structures are far stronger than in 2008-2009 as you mention, stock price volatility may still be very high.
23 BDCs - The Good, The Bad And The Maybe? Part 19: Full Circle Capital [View article]
Given the above, and the reliance for debt funding on a short term (very expensive) Revolver, we are worried that in a prospective recession a deteriorating portfolio could lead to a default under the Revolver and a forced de-leveraging in order to repay the lender.
If FULL can arrange long term capital from the SBIC or some other source ( maybe Russia, I hear they're lending) , increase it's portfolio diversification and demonstrate that non performing loan losses can be contained or offset by capital gains we will have a second look.
18 BDCs - The Good, The Bad And The Maybe? Part 14: TICC Capital [View article]
18 BDCs - The Good, The Bad And The Maybe? Part 14: TICC Capital [View article]
The Inflation Investment You've Never Heard Of [View article]
Solar Capital: BDCs - The Good, The Bad And The Maybe? Part 5 [View article]
1. Didn't want to give the impression that we are negative about SLRC in the short run. We are Long the stock right now. However, we do keep our finger on the trigger where this name is concerned more than certain others (like TCAP for example) because of the reasons given.
2. We were intrigued by the Crystal Financial acquisition, which we've written about, but we need to know more. There is a trend going on amidst many of the larger cap BDCs, which we call "style shift". BDCs are partly moving away from their traditional lending targets to maintain yields. For example, Ares Capital is committing one fifth of it's assets to a JV with GE Capital where they serve as the "first loss"partner. Moreover, the Company is getting into venture debt investing and other new sectors. Apollo Investment has begun investing in CLOs (years after that market was a great value but that's another issue). Also AINV is also investing in a "first loss" structure with Madison Capital, which is invested in secured loans (a new area for Apollo). AINV is also branching out into airplane leasing and energy financing. American Capital is getting into infrastructure financing. Prospect Capital is investing in consumer debt. Here's an example from their Earnings Release:
"On December 28, 2012, we completed a $47.9 million debt and equity recapitalization of Credit Central Holdings, LLC ("Credit Central") a branch-based provider of installment loans. Through the recapitalization, we acquired a controlling interest in Credit Central for $38.1 million in cash and 897,906 unregistered shares of our common stock."
Is Solar Capital re-inventing itself as well, or is it a one off ? The earnings Conference Call is coming up on Tuesday, and should be worth a listen.