BDC Review: Part 3 - 6 Solid Citizens

by: Philip Mause

As the clouds of recession and Euro financial panic hover over the market, it is useful to look back and see how various Business Development Companies (BDCs) performed during the Panic of 2008-09. Of course, the newbies weren't around and the BDCs in recovery generally had near death experiences. I have tried to assemble a group that did RELATIVELY well. I capitalize "relatively" because virtually every stock in the sector swooned in the February-March 2009 spike down. In retrospect, this created what has (so far) developed as a major buying opportunity. Some BDCs held up somewhat better than others and appear to have had more staying power than the group as a whole. After each company's name, I will provide Friday's closing price, the dividend yield, and the current price to net asset value ratio.

1. Hercules Technology Growth Capital (NASDAQ:HTGC): (8.85), (9.9%), (.93). HTGC has been a solid performer and has the potential for growth because it gets equity in some of the tech deals it provides financing for. It is unusual to see it trading this low although it briefly visited the $4 a share neighborhood in early 09.

2. Triangle Capital (NYSE:TCAP): (17.04), (10.30%), (1.24). TCAP has generally performed well in terms of dividends and earnings but it got slammed down into the $8 neighborhood in early 09. It has rebounded to levels above where it was trading pre Panic. I never like to pay a lot more than NAV for a BDC but the track record here probably justifies somewhat of a premium.

3. Prospect Capital (NASDAQ:PSEC): (8.25), (14.7%), (.82). PSEC generally performed well during the Panic and acquired Patriot Capital. It has had some problems in the market of late and management has conclude that it is underpriced. There is some insider buying and PSEC announced a large share repurchase plan on August 25.

4. TICC Capital (NASDAQ:TICC): (8.93), (11.2%), (.94). TICC had some problems but fairly early in the process got itself into a "no net debt" (balance sheet cash exceeds total debt) situation. I remember this one fondly because in early 2009 it appeared that any debt was dangerous because lenders would refuse to renew loans or would treat loan covenants with a ready worthy of the Book of Deuteronomy. TICC got down in the $4 region and I did well with this and could sleep a little better at night. It has recently obtained credit on attractive terms and the big test will be how adroit management is in expanding the balance sheet.

5. Fifth Street Finance (NYSE:FSC): (9.32), (13.7%), (.90). Another BDC that has generally performed well in terms of earnings, loan quality, and dividends. Its stock got hammered down to about $6 in the Panic. Since then, it has recovered nicely and is generally not available at this large a discount to Net Asset Value(NYSE:NAV). There has recently been very sizeable insider buying.

6. Main Street Capital (NYSE:MAIN): (17.97), (9.0), (1.28). This stock has pretty consistently performed well. It did dip down into the $10 range during the Panic. It has often traded at higher premiums to NAV and that has generally scared me away. It will be watching closely if a Panic ensues this Fall and opens up an opportunity to get in near NAV.

Ares Capital (NASDAQ:ARCC): really deserves to be on the list because it has performed well. I included it in the "In Recovery" group only because it acquired the remnants of Allied Capital which might have wound up in the morgue if not for the acquisition(although at the end there were some positive signs and leverage was coming down). Anyhow, ARCC has been a solid performer.

My approach to this sector has been to wait and try to buy at a big discount to NAV or, for the stronger players, at least at only a modest premium. It is not the only way to play the sector but it has worked very well for me. Many of the stocks in this group are not always available at prices like these. Insiders are loading up and at least one company has launched a share repurchase. I do not think that this is the bottom of the market but I think it is much closer to the bottom than to the top - especially for these stocks. And it's nice to get a yield of between 9 and 14.7 per cent while you are waiting.

Disclosure: I am long TICC, PSEC, FSC, HTGC, ARCC.

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