Main Street Capital (MAIN -0.7%), Fidus Investment (FDUS -4.7%), and Monroe Capital (MRCC -2.2%) have all had big runs higher over the past year, but are under pressure this morning, as Baird downgrades each to Neutral from Outperform.
The sector has been a big beneficiary of the rates lower-for-longer thesis, the bounce in oil and the related major move higher in high-yield.
All three of those themes have been called into question since Labor Day. SA author BDC Buzz reminds not all BDCs are created equal, and says the higher risk ones will likely be underperformers in a correction ... Think Prospect Capital (PSEC -4%), TICC Capital (TICC -1%) and KCAP Financial (KCAP -2.7%). Fifth Street Finance (FSC -2%), Medley Capital (MCC -2.6%) and Full Circle Capital (FULL -0.4%) also fit the bill, and PennantPark (PNNT -1.5%), Gladstone (GLAD -3.4%), and Apollo Investment (AINV -1.2%) have the highest amount of oil exposure.
Those BDCs with "true" first-lien assets and stable NAV will be the outperformers: New Mountain Finance (NMFC -1.8%), Solar Senior (SUNS -0.1%), Goldman Sachs BDC (GSBD -0.7%), Golub Capital (GBDC -0.5%), FS Investment (FSIC -1.7%), Monroe Capital (MRCC -0.1%), TPG (TSLX -0.6%), Main Street (MAIN -0.1%), PennatPark Floating Rate (PFLT -0.1%), Hercules (HTGC -1.4%), Horizon (HRZN -1.8%), and TCP Capital (TCPC -0.7%) are worth a look.
Small-cap banks and BDCs are "increasingly less compelling" after recent run-ups, and without catalysts to support further multiple expansions, says Baird's Bryce Rowe.
For more gains, he's looking for what he calls "higher quality" BDCs - those preserving capital and earning their cost of capital. Fidus Investment (FDUS +1.9%), Main Street Capital (MAIN -0.1%), Monroe Capital (MRCC +1.1%) and Triangle Capital (TCAP +0.1%) fit the bill, he says.
He downgrades from Outperform to Neutral two others which have had big moves higher - New Mountain Finance and Stellus Capital (SCM -0.9%).
The bounce since 2016's brutal start has business development companies - as measured by BDCS - marginally positive for the year.
Baird's Bryce Rowe reminds that the average BDC still trades at just 85% of NAV (up from 72% at the February bottom), meaning they're still worth buying on the dip.
"The lower-for-longer rate environment will provide support for the sector, and we believe the primary beneficiaries will be high-quality BDCs that are sufficiently earning their dividend distributions and preserving NAV/share on a long term basis," says Rowe.
His favorites are the sector's highest quality names, wtih Alcentra Capital (NASDAQ:ABDC) the top pick. Also worth a look are Fidus Investment (NASDAQ:FDUS), Monroe Capital (NASDAQ:MRCC), Main Street Capital (NYSE:MAIN), New Mountain Finance (NYSE:NMFC), and Triangle Capital (NYSE:TCAP).
The amended syndicated credit facility increases the size of the revolver to $160M from $135M, with the accordion feature now $300M from $200M. Pricing is reduced by 25 basis points to Libor +3%, with another step-down to Libor+2.75% when MRCC's net worth exceeds $225M.