Leading the way are THL Credit (TCRD +4.1%), Fidus Investment (FDUS +4.6%), NGP Capital Resources (NGPC +3.2%), and BlackRock Kelso (BKCC +3.2%), but the entire BDC sector is lit up bright green a day ahead of its stocks being removed from the Russell indices.
A selection of others: Prospect Capital (PSEC +0.5%), Ares Capital (ARCC +1.9%), TPG Specialty Lending (TSLX +0.8%), Triangle Capital (TCAP +3.7%), TICC Capital (TICC +2.2%), PennantPark (PNNT +2.7%), Medley Capital (MCC +2.1%), TCP Capital (TCPC +2.2%), Gladstone Commerical (GLAD +2.8%), Capitala Finance (CPTA +2.7%).
The May 15 deadline for the SEC to change BDC's fee-reporting standards has come and gone with no action, meaning the sector's stocks will be removed from Russell's indices on June 27. A tick higher in the struggling sector since May 15 suggests maybe investors have discounted the news.
Looking for what to buy now, the team at Wells has put together an Adjusted Cash Flow Coverage metric. From Wells: "It is important for investors to discern which BDCs are overly reliant on fee income as a percentage of total revenues, which BDCs are not covering their dividend and which BDCs book meaningful non-cash income such as PIK."
The sector adjusted cash flow coverage average is 81%. Among those coming in above: GLAD, HRZN, TCAP, TCPC, HTGC, GBDC, ARCC. Among those below: TPVG, BKCC, PNNT, MCC, FSC. Struggling the most of late, Prospect Capital is pretty close to the sector average at 79%.
The selloff in BDCs is a buying opportunity, writes BDC reporter, noting the opportunity today to invest in a basket of BDCs (using BDCS as a proxy) at an 11% higher yield than just three months ago. The sector is yielding 43% more than high yield bonds (HYG) and nearly double floating rate loans (BKLN).
The higher yield, of course, reflects market concern distributions are set to fall (and BKCC and MCGC cut in Q1), but for the sector as a whole, distributions have been fairly stable over the last three years. Further, a number of players are under-leveraged or in growth phase, and occasionally have realized gains which are paid out as special distributions.
With the private-equity business in high cotton, Ares Management (ARES) hits the public markets with an 11.36M common unit offering, raising about $216M. The firm - whose portfolio includes Ares Capital (ARCC) and Ares Commercial Real Estate (ACRE) - is headed by Tony Ressler, an alumnus of Drexel Burnham and Apollo Global, where he worked alongside brother-in-law Leon Black.
Ares Capital (ARCC) adds to its credit line, boosting the total amount available to $1.17B from $1.06B with five lenders increasing their commitments. The final maturity is lengthened by a year to May 2019 and the interest rate remains unchanged - Libor + 2%.
Grant Haggard and Brian Moncrief have joined Ares Capital (ARCC) as Managing Directors to focus on senior and selected subordinated financing opportunities. They will based out of Chicago. The two have a combined 35 years of experience in leveraged finance.
Amid high times for private-equity, Ares Management is prepping the largest IPO of an alternative asset manager since Carlyle Group went public two years ago, reports Bloomberg. Based in L.A., the firm has $74B in AUM. Its CEO Tony Ressler is an alumnus of Drexel Burnham and Apollo Global where he worked alongside Leon Black (his brother-in-law).
Among Ares' portfolio is Ares Capital (ARCC) and Ares Commercial Real Estate (ACRE).
As part of its strategy to boost energy lending capabilities, Ares Capital (ARCC) hires Owen Hill and Jonathan Shepko as Managing Directors to focus on debt financing opportunities in the oil and gas industries.
"Our expanded focus on lending to the oil and gas industry is a direct result of the growing market for domestic energy solutions and the changing appetite and risk tolerance of traditional banks for providing debt financing in the industry."
Hill and Shepko have more than 20 years combined oil and gas lending experience at various institutions.
Unless the SEC changes the sector's fee-reporting standards by May 15, Russell told clients last night it will remove BDCs from its indexes during its June reconstitution.
Earlier calling such a move somewhat of a nonevent, Wells' team sounds like it's singing a different tune now. They believe there's a chance the SEC does change the rules, because not doing so would "likely drive sophisticated institutional capital away from the space." More: "We believe this is the very capital that is adept on calling out subpar BDCs. … In our view, a healthy and sophisticated public market is needed to ensure that only those deserving BDCs are the ones to receive the capital."
It's no little deal as an estimated 8% of all BDC shares are owned by funds benchmarked to the Russell 2000 index.
Index maker CRSP, whose benchmarks are tracked by Vanguard, already bars BDCs, calling them "essentially publicly traded private investment vehicles ... [we] excluded BDCs from the get-go, recognizing that they really don’t represent equity securities of the type that are trying to be captured in equity indexes."
In a big green down for the markets, most of the BDC sector is in the red. Prospect (PSEC -0.5%), Fifth Street (FSC -1.5%), Ares(ARCC -0.9%), BlackRock Kelso (BKCC -1.6%), Medley (MCC -0.9%) THL (TCPC -1.6%), NGP (NGPC -2.9%), New Mountain (NMFC -1.6%), PennantPark (PNNT -0.5%), Triangle (TCAP -0.7%).
Declines in the sector in response to Russell's decision to exclude BDCs from its indices are due to technical, not fundamental reasons, says analyst Jonathan Bock. "We believe select BDCs offer compelling return opportunities in this low rate, low credit loss environment. In our view, those risk/return elements are unaffected by whether or not the BDCs are included in Russell Indices."
Among Wells' highest rated names: American Capital (ACAS), Ares Capital (ARCC), Golub Capital (GBDC), Medley Capital (MCC), and TCP Capital (TCPC).
WIth business development companies getting the boot from S&P indices, will the Russell follow suit? It's a significant issue as investors are far more heavily invested in BDCs though the Russell indices than through S&P, writes Brendan Conway. He notes ownership of BDCs by Russell-tracking index funds are as high as 38 days worth of trading volume, and Wells Fargo estimates there are 24 BDCs where 10 or more days of average volume would be required to unload them.
Wells, however, does not see Russell following S&P's lead, with item #1 being Russell's desire to "represent small cap reality." "Russell Indices receive acclaim because they are willing to provide investors access to the true investable small cap universe. To the extent BDCs are excluded, this would deprive investors the opportunity to invest in what has become a very large/growing industry."
The following list is those BDCs with 10 or more days of average volume in index funds tracking Russell indices.