Identifying Risk In BDCs - The Prospect Capital Example

| About: Prospect Capital (PSEC)
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Summary

PSEC has cut its dividend twice since 2010.

The NAV trend is on a relatively slow pace in the wrong direction.

The dividend has been above the NII/share for three straight quarters - which frequently indicates the dividend is in danger of a cut.

But the PSEC yield is moderately higher than average - which indicates some of the 'eventual' and potential bad news is already price in.

The purpose of this series on Business Development Companies - or BDCs - is to help you avoid the dividend cuts while capturing some much needed income. The intro article in the series was "How To Identify Risk In BDCs." This article is on Prospect Capital Corporation (NASDAQ:PSEC). This BDC sells at a moderately higher yield than average. Is that high dividend yield correlated to higher risks? Are you getting too much yield for the higher risks? I will take you through the last several earnings releases, show the 23 point red flag checklist of assessing the quality of PSEC's income, show the relative valuations for the sector, and present my assessment of Prospect Capital Corporation.

Before I show the Q1-17 numbers, I want to show the analyst projections.

Earnings Estimates from Yahoo Finance before the earnings release:

Current Qtr. (Mar 2017) Next Qtr. (Jun 2017) Current Year (2017) Next Year (2018)
No. of Analysts 6 6 6 5
Avg. Estimate 0.24 0.24 0.94 0.96
Low Estimate 0.23 0.23 0.91 0.92
High Estimate 0.25 0.27 0.97 1.00
Year Ago EPS 0.25 0.26 1.04 0.94
Revenue Estimate Current Qtr. (Mar 2017) Next Qtr. (Jun 2017) Current Year (2017) Next Year (2018)
No. of Analysts 5 5 5 4
Avg. Estimate 184.12M 189.03M 736.56M 748.69M
Low Estimate 178.71M 179.63M 722M 707M
High Estimate 189.64M 202.12M 755.1M 775.7M
Year Ago Sales 189.49M 193.04M 791.97M 736.56M

The Q1-17 actual numbers were ugly. NII (Net Investment Income)/share was the lowest since the beginning of 2014. TII (Total Investment Income) dollars were the lowest since the beginning of 2014 - when there were fewer shares. And while all the bad news was happening, the NII/TII ratio was falling (meaning the percentage of TII that became NII was falling) along with the NAV (or Net Asset Value) per share.

Prospect_Capital_Corporation

Q1-17 Q4-16 Q3-16 Q2-16 Q1-16 Q4-15 Q3-15 Q2-15 Q1-15 Q4-14 Q3-14 Q2-14 Q1-14 Q4-13 Q3-13
Realized & Unrealized Gains -53.568 16.599 2.508 3.790 -12.095 -195.965 -63.425 7.987 -5.949 -5.355 -10.355 -12.491 -16.422 -5.671 3.798
Realized & Unrealized Gains/share -.1490 .0463 .0070 .0106 -.0340 -.5516 -.1777 .0222 -.0166 -.0151 -.0301 -0.0365 -.0492 -.0197 .0111

Out of the last 15 quarters, PSEC has had gains in 5. This record is well below average.

Prospect_Capital_Corporation Q1-17 Q4-16 Q3-16 Q2-16 Q1-16 Q4-15 Q3-15 Q2-15 Q1-15 Q4-14 Q3-14 Q2-14 Q1-14
Interest Income without CLOs 125.147 135.746 132.569 134.519 134.748 139.601 146.507 150.209 145.957 149.019 144.743 171.841 124.667
Structured credit Income 36.564 39.045 39.081 40.301 44.244 46.902 44.766 40.818 39.046 39.795 39.397 31.709
Dividend Income 0.817 1.379 2.384 1.439 8.301 13.546 3.215 2.056 1.371 2.011 2.225 3.266 7.590
Other/Fee Income 8.504 7.310 5.798 16.779 2.200 9.142 5.733 5.757 4.986 8.058 15.656 7.733 26.361
Total investment income 171.032 183.480 179.832 193.038 189.493 209.191 200.251 198.830 191.350 198.883 202.012 182.840 190.327
Fee Income Percent 4.97% 3.98% 3.22% 8.69% 1.16% 4.37% 2.88% 2.89% 2.61% 4.05% 7.75% 4.23% 13.85%

TII fell during a quarter when fee income was OK. The fall in TII should scare you.

Prospect_Capital_Corporation Q1-17 Q4-16 Q3-16 Q2-16 Q1-16 Q4-15 Q3-15 Q2-15 Q1-15 Q4-14 Q3-14 Q2-14 Q1-14 Q4-13
Total investment income 171.032 183.480 179.832 193.038 189.493 209.191 200.251 198.830 191.350 198.883 202.012 182.840 190.327 178.090
Net investment income 73.080 84.405 78.919 91.367 87.626 100.893 91.242 89.518 87.449 91.325 94.463 84.148 98.523 92.215
Investments @ fair value 6.025 5.937 6.110 5.878 6.005 6.180 6.431 6.559 6.603 6.524 6.253 6.254 6.006 4.886
Wt Av Share Count 359.402 358.495 357.527 356.555 355.779 355.241 356.962 359.091 358.449 354.100 343.359 342.627 333.500 287.016
TII/share $0.4759 $0.5118 $0.5030 $0.5414 $0.5326 $0.5889 $0.5610 $0.5537 $0.5338 $0.5615 $0.5796 $0.5336 $0.5707 $0.6205
NII/share $0.2033 $0.2354 $0.2207 $0.2562 $0.2463 $0.2840 $0.2556 $0.2493 $0.2440 $0.2579 $0.2710 $0.2456 $0.2954 $0.3213
NAV/share $9.43 $9.62 $9.60 $9.62 $9.61 $9.65 $10.17 $10.31 $10.30 $10.35 $10.47 $10.56 $10.68 $10.73
Wt Av Yield 12.3% 13.2% 12.8% 13.2% 13.4% 13.3% 13.0% 12.7% 12.4% 12.3% 11.9% 12.1% 12.5% 12.9%
Port. Co. Debt/EBITDA 4.15x 4.21x 4.07x 4.18x 4.12x 4.19x 4.36x 4.2x 4.2x 4.1x
NII/TII ratio 42.7% 46.0% 43.9% 47.3% 46.2% 48.2% 45.6% 45.0% 45.7% 45.9% 46.8% 46.0% 54.3% 51.6%
Number of Non-accruals 9 8 8 7 4 6 5 4 6 9
Non-accruals at Fair Value 1.4% 1.4% 1.6% 1.4% 0.5% 0.5% 1.4% 0.1% 0.5% 0.1%
Structured Finance Investments 1,145,589 1,146,850 1,128,530 1,083,540 1,105,379 1,156,646 1,173,536 1,101,347 1,047,817 1,072,626 1,097,442 1,072,744
% of Portfolio in CLOs at Cost 18.3% 18.8% 17.9% 17.8% 17.8% 18.1% 18.2% 16.8% 15.9% 16.5% 17.3% 16.8%
% of Port in CLOs at Fair Value 17.8% 18.3% 16.9% 17.1% 16.6% 17.5% 18.7% 17.3% 16.6% 17.2% 18.5% 18.0%
% of Portfolio in Energy at Cost 5.7% 5.8% 4.5% 5.8% 4.6% 4.6% 4.4% 4.4% 4.5% 4.5% 5.6% 5.6% 4.1%
% of Port in Energy at Fair Value 2.5% 2.5% 2.3% 3.0% 2.8% 3.4% 3.8% 3.7% 4.1% 0.9% 5.1% 5.1% 3.3%

I see bad news in the trends for both TII and NII.

Prospect_Capital_Corporation Q1-17 Q4-16 Q3-16 Q2-16 Q1-16 Q4-15 Q3-15 Q2-15 Q1-15 Q4-14 Q3-14 Q2-14 Q1-14 Q4-13
Debt 2,689.027 2,593.988 2,619.875 2,748.269 2,695.777 2,749.816 2,819.291 2,983.736 2,983.263 2,858.505 3,090.755 2,773.051 2,692.002 1,796.221
Debt/share 7.4819 7.2358 7.3278 7.7078 8.0284 7.7407 7.8980 8.3091 8.3227 8.0726 9.0015 8.0935 8.0720 6.2583
Debt/share to NAV 79.34% 75.21% 76.33% 80.12% 82.54% 80.21% 77.66% 80.59% 80.80% 78.00% 85.97% 76.64% 75.58% 58.32%
Interest expense 41.464 40.848 41.669 41.838 41.719 42.205 41.957 43.289 42.213 42.244 42.914 41.693 31.747 29.256
Interest expense/share 0.1154 0.1139 0.1165 0.1173 0.1173 0.1188 0.1175 0.1205 0.1178 0.1193 0.1250 0.1217 0.0952 0.1019
Interest expense/TII 24.24% 22.26% 23.17% 21.67% 22.02% 20.17% 20.95% 21.77% 22.06% 21.24% 21.24% 22.80% 16.68% 16.43%
Annualized Int exp/Debt 6.17% 6.30% 6.36% 6.09% 6.19% 6.14% 5.91% 5.80% 5.66% 5.91% 5.55% 6.01% 4.72% 6.52%
PWAY - Int exp/Debt 613 bps 690 bps 644 bps 711 bps 721 bps 716 bps 709 bps 690 bps 674 bps 639 bps 635 bps 609 bps 778 bps 638 bps

If a BDC owns "risk stuff", the cost of borrowing money to buy such risky stuff tends to be high. The cost the credit market charges for PSEC to borrow money strongly indicates the credit market views PSEC as risky.

For those who want a one-handed economist - PSEC is not your BDC. It is more of an octopus than tad pole. PSEC is risky. "On the other hand", most of that risk is already priced in.

The Checklist of red flags for PSEC

  1. Well covered dividend - The 2017 NII projection is $0.94; the 2018 projection is $0.92; and the annual dividend is $1.00. Grade = Fail.
  2. Rising NAV - PSECx is a very small fail with a -1.87% LTM NAV change.
  3. A BDC with a lower than sector average Portfolio Company Weighted Average Yield - PSEC's PWAY = 12.30%. Grade = small Fail.
  4. High income projection accuracy when looking at the annual NII numbers. PSEC had 6% NII shortfalls in 2014, 2015 and 2016. That is ugly - but it is better than average. Grade = an ugly Pass.
  5. Lower revenue volatility when comparing the quarterly TII numbers. PSEC had two quarters when TII fell more than 7%. That is roughly equal to sector average. Grade = ugly Pass.
  6. Has lower yields on its IOUs (under 5%). The Q1-17 annualized interest expense ratio was 6.17% and it is consistently in the 6s. Grade = Fail.
  7. An earnings projection that is equal to or lower than a run rate NII based on Portfolio times PWAY + Run Rate Fee Income. Run rate NII = $0.9760 compared to 2017 projection of $0.88 ($0.94 before the earnings release). Grade = Pass.
  8. A dividend/NAV ratio that is 200 bps lower than the PWAY. The PWAY is oscillating. It was a low tide 12.3% in Q1-17 compared to a Dividend/NAV ratio of 10.6%. The Q1 spread was 170 bps while the Q3 spread was 280. The Dividend/NAV needs to rise into the 12s before a cut looks certain. Grade = Pass.
  9. BDCs with close to the same PWAY's over 12% have an average yield of 10.23% compared to PSEC's 12.09%. Grade = A+.
  10. BDCs with close to the same lack of dividend coverage sell at an average yield of 10.24%. Grade = A+.
  11. BDCs with close to the same NAV trend have average yields - and the sector average yield is 9.71%. Grade = A+.
  12. Has more than 75 portfolio company investments. Grade = Pass.
  13. A debt/NAV ratio that is lower than 80%. Q1-17 ratio = 79.34%. Grade = Pass this quarter - but this grade does oscillate.
  14. An NII/TII ratio over 50%. Q1-17 ratio was 42.7%. Grade = Fail.
  15. A better than sector average trend in "gains". Out of the last 15 quarters, PSEC has had gains in 5. That is below average. Grade = Fail.
  16. Provides information of the influence on NAV of secondary offerings or share buybacks. Not that applicable, there have been no secondary offerings since Q4-13.
  17. Reports Debt/EBITDA and interest coverage ratio numbers on its portfolio companies. Grade = Fail.
  18. Transparency on the amount of accelerated amortization of upfront fees. Grade = Fail.
  19. Reports Q4 numbers. Grade = Pass.
  20. No secondary offerings below NAV. Grade = Pass.
  21. Has less than 5% in structured products or CLOs. CLOs are 18.3% of the portfolio - but PSEC is not taking the degree of losses that most BDCs do on this asset class. Grade is a "heavily adjusted incomplete" due to that context.
  22. Income that comes from PIK or payment in kind income less than 5% of income. TII = 534 while PIK = 14 (or 2.6%) for the last 9 months. Grade = Pass
  23. Energy loans less than 5% share of portfolio. Energy was 5.7% at cost and oscillating around that level. Grade = small and nebulous Fail.

PSEC fails, nebulous fails, small fails or has an incomplete on (1, 2, 3, 6, 9, 14, 15, 17, 18, 21, 23) 11 of the 23 points - or 8 of 23 deleting the small and nebulous fails. Many of the green flags were due to valuation. Bad BDCs have fails in the mid-teens. Good BDCs in the low single digits. PSEC is far from good - and less good than average. But it is priced that way.

Showing the math for point 7:

TII Calculation
Metric Fee Income Interest Income Totals
Formula average for last 4 quarters portfolio times yield / 4 Sum of components
Numbers 9.603 6025 million times .123 / 4 194.872
NII Calculation
Metric NII/TII Ratio NII NII/share Result
Formula TII times NII/TII NII/ share count
Numbers 45% .45 times 194.872 87.692 / 359.402 $0.2440/share

Harvesting metrics from the past:

2010 2011 2012 2013 2014 2015 2016 2017
PSEC Q1-10 Q2-10 Q3-10 Q4-10 Q1-11 Q2-11 Q3-11 Q4-11 Q1-12 Q2-12 Q3-12 Q4-12 Q1-13 Q2-13 Q3-13 Q4-13 Q1-14 Q2-14 Q3-14 Q4-14 Q1-15 Q2-15 Q3-15 Q4-15 Q1-16 Q2-16 Q3-16 Q4-16 Q1-17 Q2-17
Div 0.41 0.41 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.33 0.33 0.33 0.33 0.33 0.33 0.33 0.33 0.33 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25
NII/share 0.29 0.28 0.28 0.23 0.27 0.31 0.26 0.34 0.51 0.51 0.46 0.51 0.26 0.38 0.32 0.32 0.31 0.25 0.27 0.26 0.24 0.25 0.26 0.28 0.25 0.26 0.22 0.24 0.20
NAV 10.09 10.28 10.24 10.25 10.33 10.36 10.41 10.69 10.82 10.83 10.88 10.81 10.71 10.72 10.72 10.73 10.68 10.56 10.47 10.35 10.30 10.31 10.17 9.65 9.61 9.62 9.60 9.62 9.43
Div/NAV 16.2 16.0 11.7 11.8 11.8 11.7 11.7 11.4 11.2 11.2 11.2 12.2 12.3 12.3 12.4 12.3 12.4 12.6 12.7 12.9 9.7 9.7 9.8 10.4 10.4 10.4 10.4 10.4 10.6
WtAvYld 14.7 13.9 13.6 13.4 12.9 12.7 12.3 11.9 12.3 12.4 12.7 12.7 13.3 13.4 13.2 12.8 13.2 12.3

The last dividend cut in Q1-15; PSEC had gone 6 quarters with NII below the dividend. PSEC has gone three quarters with NII below the dividend.

The last dividend cut the Dividend/NAV was 12.9%. The current ratio is 10.6% and slowly rising. With the NII saying a cut is near and the Dividend/NAV saying a cut is distant and not inevitable in the next 6 quarters - I believe the Dividend/NAV.

What if the NAV continues its $0.20 trend down and NII oscillates around 20 cents per quarter - where should the dividend be in two years? The last cut sent the Dividend/NAV ratio to 9.7%.

At a hypothetical NAV of (943 - 20 - 20) $9.03, a 9.7% Dividend/NAV would place the annual dividend at $0.8759. Rounding up to 88 - the quarterly dividend would be 22. The size of the cut would be 12%.

Over the next two years, one is getting (1,209 - 971) 238 bps more in yield than sector average per year while holding PSEC.

Will the sector average dividend cut over the next two years be more or less than 12%? That is not an easy call. Senior Floating Rate type BDCs could have dividend gains as TII increases. Troubled BDCs currently have decent coverage.

But if the cuts continue - then PSEC is already partially discounted for a tiny dividend cut - and it should outperform. If the cuts slow significantly, then the PSEC's tiny cut will stand out as ugly - and it will underperform.

Let's end with a look at the year to date and valuation spreadsheets:

BDCs 05-26-17

Yield in the spreadsheet below is based on the Q2-17 'regular' dividend. Spreadsheet header abbreviations: Div = dividend; EPS = earnings per share; LTM = last twelve months; NAV = Net Asset Value; PWAY = Portfolio Weighted Average Yield (or the yield on the investments that they own); YTD = year to date. The dividend to EPS ratio is a measure of dividend safety. Due to calendar and fiscal years failing to overlap, I also include a dividend to the sum of the last four quarters of NII in the Div/NIIltm column. After the Price/NAV ratio, the next column displays the percent change in price YTD. The next display price change plus YTD dividends accrued on the payment date - not the earned date. For the last four columns - the first measures the percentage change in the 2017 EPS projection since the beginning of the year; the second measures the change in the price target since the beginning of the year; the third measures the change in the Q2-17 dividend from the Q2-16 dividend; and the last measures the change in NAV between Q1-17 and Q1-16. Special dividends are not included in this data. ARCC, FDUS, MAIN and TCPC have paid special dividends on a near regular schedule.

Share Price Div/ Div/ Div/ Div/ Q1-17 Price YTD Percent Change LTM % LTM % Last3yr Last 3Yr
___The_Company_name_and_stock_ticker___ 1-01 05-26 Yield PWAY EPS17 EPS18 NIIltm NAV NAV NAV Price Pr+Div EPS Target DivChng NAVChng DivChng NAVChng
Alcentra_Capital_Corporation_____ (NASDAQ:ABDC) 11.97 13.32 10.21 11.70 94.4 88.3 85.6 10.1 13.43 0.99 11.28 16.96 -3.36 1.79 0.00 -6.80 0.00 -9.01
American Capital Senior Floating (NASDAQ:ACSF) 11.90 13.35 8.69 6.71 100.0 99.1 96.6 8.5 13.66 0.98 12.18 14.62 -0.85 7.17 0.00 16.55 3.57 -9.60
Apollo Investment Corporation (NASDAQ:AINV) 5.86 6.41 9.36 10.30 95.2 93.8 89.4 8.9 6.74 0.95 9.39 14.51 -4.55 0.16 -25.00 -7.42 -25.00 -22.26
Ares Capital Corporation (NASDAQ:ARCC) 16.49 16.79 9.05 9.30 104.8 91.6 104.1 9.2 16.50 1.02 1.82 4.12 -9.94 8.99 0.00 0.00 0.00 0.49
BlackRock Capital Investment (NASDAQ:BKCC) 6.96 7.68 9.38 11.70 87.8 86.7 76.3 8.8 8.22 0.93 10.34 15.52 -4.65 1.79 -14.29 -14.73 -14.29 -14.29
CM Finance Inc (NASDAQ:CMFN) 9.30 10.45 9.57 9.72 88.5 93.5 81.6 8.1 12.32 0.85 12.37 17.74 -3.42 0.00 -27.95 3.01 -26.04 -15.90
Capitala Finance Corp. (NASDAQ:CPTA) 12.93 13.54 11.52 13.20 102.0 96.3 88.8 9.9 15.71 0.86 4.72 7.73 -4.97 0.92 -17.02 -3.56 -17.02 -22.73
Fidus Investment Corporation (NASDAQ:FDUS) 15.73 17.15 9.10 12.90 101.3 96.3 113.6 9.9 15.80 1.09 9.03 11.51 -4.94 3.80 0.00 3.61 2.63 3.81
Fifth Street Finance Corp. (FSC) 5.37 4.17 11.99 10.40 89.3 94.3 74.4 6.9 7.23 0.58 -22.35 -20.02 -25.33 -23.73 -30.56 -13.21 -49.98 -26.30
Fifth Street Senior Floating Rate (FSFR) 8.71 7.90 9.62 8.10 102.7 100.0 95.4 7.0 10.83 0.73 -9.30 -7.12 -18.68 -10.53 -15.56 -3.13 -29.63 -28.42
Franklin Square Investment Corp. (NYSE:FSIC) 10.30 9.25 9.64 10.20 110.1 110.1 103.4 9.4 9.45 0.98 -10.19 -5.86 -6.90 3.02 0.00 7.14 0.00 -8.07
Gladstone Investment Corporation (NASDAQ:GAIN) 8.46 9.26 8.10 12.80 101.4 102.7 102.2 7.5 9.95 0.93 9.46 11.67 0.00 8.57 0.00 7.92 25.00 19.30
Garrison Capital Inc. (NASDAQ:GARS) 9.35 8.79 12.74 10.80 101.8 113.1 103.5 9.4 11.90 0.74 -5.99 -2.99 -9.84 -9.42 -20.00 -11.85 -20.00 -22.98
Golub Capital BDC, Inc. (NASDAQ:GBDC) 18.39 20.33 6.30 7.70 102.4 100.0 103.5 8.1 15.88 1.28 10.55 12.29 -4.58 5.43 0.00 0.19 0.00 3.05
Gladstone Capital Corporation (NASDAQ:GLAD) 9.39 9.98 8.42 11.40 100.0 98.8 100.0 9.8 8.53 1.17 6.28 10.01 -2.33 15.35 0.00 7.70 0.00 -12.87
Goldman Sachs BDC (NYSE:GSBD) 23.52 22.63 7.95 11.80 91.8 89.6 89.6 9.9 18.26 1.24 -3.78 0.04 -3.92 5.26 0.00 -2.20 9.76 -8.61
Harvest Capital Credit (NASDAQ:HCAP) 13.75 13.03 10.36 14.80 98.5 96.4 87.5 9.7 13.89 0.94 -5.24 -1.06 -4.20 1.75 0.00 -0.07 0.00 -4.07
Horizon Technology Finance Corp (NASDAQ:HRZN) 10.53 11.09 10.82 15.50 105.3 100.8 86.2 9.9 12.11 0.92 5.32 10.16 -5.00 -1.66 -13.04 -11.09 -13.04 -15.43
Share Price Div/ Div/ Div/ Div/ Q1-17 Price YTD Percent Change LTM % LTM % Last3yr Last 3Yr
___The_Company_name_and_stock_ticker___ 1-01 05-26 Yield PWAY EPS17 EPS18 NIIltm NAV NAV NAV Price Pr+Div EPS Target DivChng NAVChng DivChng NAVChng
Hercules Capital (NASDAQ:HTGC) 14.11 13.22 9.38 13.40 100.0 90.5 91.7 12.7 9.76 1.35 -6.31 -1.91 -6.06 1.11 0.00 -0.51 0.00 -7.75
KCAP Financial, Inc. (NASDAQ:KCAP) 3.98 3.49 13.75 7.00 129.7 129.7 105.3 9.3 5.14 0.68 -12.31 -6.28 -24.49 -10.53 -20.00 -6.55 -52.00 -32.55
Main Street Capital Corporation (NYSE:MAIN) 36.77 38.52 5.76 9.68 99.1 97.8 98.5 9.9 22.44 1.72 4.76 7.27 -2.61 10.19 2.78 5.95 12.12 11.42
Medley Capital Corporation (NYSE:MCC) 7.51 6.00 10.67 11.60 94.1 87.7 84.2 7.2 8.94 0.67 -20.11 -17.98 -17.07 -8.32 -46.67 -8.78 -56.76 -29.55
Monroe Capital Corporation (NASDAQ:MRCC) 15.38 15.61 8.97 9.50 95.2 88.1 94.0 9.8 14.34 1.09 1.50 3.77 -7.55 2.94 0.00 -0.76 2.94 2.50
New Mountain Finance Corp. (NYSE:NMFC) 14.10 14.60 9.32 11.10 100.0 99.3 100.3 10.0 13.56 1.08 3.55 5.96 -1.45 5.61 0.00 5.36 0.00 -6.68
OFS Capital Corporation (NASDAQ:OFS) 13.76 14.12 9.63 12.03 100.7 91.9 95.3 9.1 14.98 0.94 2.62 5.09 -9.40 10.43 0.00 2.25 0.00 3.67
Oak Hill Advisors (NASDAQ:OHAI) 1.73 1.47 5.44 12.80 21.6 18.6 29.8 2.6 3.02 0.49 -15.03 -13.87 -13.95 0.00 -66.67 -37.73 -87.50 -65.41
Prospect Capital Corporation 8.35 8.27 12.09 12.30 113.6 116.3 109.2 10.6 9.43 0.88 -0.96 4.13 -5.38 -1.02 0.00 -1.87 -24.81 -11.70
PennantPark Floating Rate Capital (NASDAQ:PFLT) 14.11 14.11 8.08 7.90 104.6 97.4 104.7 8.1 14.05 1.00 0.00 3.43 -5.22 2.00 0.00 3.77 5.56 -2.84
PennantPark Investment Corp (NASDAQ:PNNT) 7.66 7.51 9.59 11.90 83.7 88.9 79.7 7.9 9.09 0.83 -1.96 0.39 0.00 7.82 -35.71 2.94 -35.71 -18.33
Saratoga Investment Corp. (NYSE:SAR) 20.61 21.78 8.45 10.80 92.9 92.0 88.0 8.3 22.21 0.98 5.68 10.14 -7.04 9.48 12.20 0.68 Infinity 3.98
Stellus Capital Investment (NYSE:SCM) 12.06 14.06 9.67 11.30 103.0 95.8 97.8 9.8 13.84 1.02 16.58 19.40 -2.94 11.96 0.00 5.97 0.00 -4.49
Solar Capital Ltd. (NASDAQ:SLRC) 20.82 21.92 7.30 10.20 95.8 88.4 95.9 7.4 21.75 1.01 5.28 9.13 -7.73 4.74 0.00 3.18 0.00 -3.03
Solar Senior Capital Ltd. (NASDAQ:SUNS) 16.44 17.21 8.19 8.00 100.0 98.6 99.0 8.4 16.81 1.02 4.68 6.83 -0.70 9.26 0.00 0.66 0.00 -6.82
Triangle Capital Corp. (NYSE:TCAP) 18.34 18.31 9.83 11.50 102.3 95.2 103.3 11.8 15.29 1.20 -0.16 2.29 -6.88 1.62 0.00 1.80 -16.67 -2.74
TCP Capital Corp. (NASDAQ:TCPC) 16.90 17.04 8.45 11.10 94.1 91.1 96.2 9.7 14.92 1.14 0.83 2.96 -2.55 3.53 0.00 1.77 0.00 -2.61
THL Credit, Inc. (NASDAQ:TCRD) 10.01 9.92 10.89 11.40 95.6 93.1 87.2 9.2 11.71 0.85 -0.90 1.80 -5.83 -2.22 -20.59 -4.33 -20.59 -12.22
TICC Capital Corp. (TICC) 6.61 7.23 11.07 13.25 129.0 153.8 175.4 10.6 7.53 0.96 9.38 12.41 -4.62 9.09 -31.03 27.84 -31.03 -23.01
TriplePoint Venture Growth (NYSE:TPVG) 11.78 13.53 10.64 10.10 94.1 97.3 96.8 10.8 13.38 1.01 14.86 20.97 1.32 7.84 0.00 -0.15 20.00 -8.23
TPG Specialty Lending (NYSE:TSLX) 18.68 20.73 7.53 10.50 86.2 87.6 82.5 9.7 16.04 1.29 10.97 15.15 2.84 10.40 0.00 6.15 2.63 3.42
WhiteHorse Finance (NASDAQ:WHF) 12.17 14.21 9.99 11.80 97.3 97.3 97.7 10.3 13.80 1.03 16.76 22.60 0.69 15.82 0.00 3.92 0.00 -9.39
Sector Average 9.71 10.95 97.8 9.1 0.98 2.14 5.59 -6.10 3.01 -0.41
With the 10 Treasury at 2.25% and sector average yield on Q2 dividends at 9.71% - the spread is 746 bps.
The cap weighted ETN BDCS has a price change of -0.88% year to date - with dividends its total return is 3.03%.
The SPY or S&P 500 EFT is 7.64% year to date. - and with unreinvested dividends is 8.10% year to date.

BDC Earnings Growth & P/E Ratios 05-26

Fiscal and calendar years are not in sync. BDCs than began fiscal 2017 on or before calendar Q4-16 include AINV, FULL, FSC, GAIN, GBDC, GLAD, MCC, PSEC, PFLT, and PNNT. The range metric is the high estimate minus the low estimate, with that result divided by the consensus estimate - and serves as one of several measurements for assessing risk. Almost all EPS projections are from Yahoo Finance. I lack 2018 analyst projections for OFS, OHAI and TPVG.

Earnings / Share Earn. Growth P/E Ratios Current Fiscal Year
Co. 2012 2013 2014 2015 2016 2017 2018 15to16 16to17 17to18 2016 2017 2018 High Low Range Yr End
ABDC 0.00 0.00 0.86 1.43 1.57 1.44 1.54 9.79% -8.28% 6.94% 8.48 9.25 8.65 1.51 1.39 8.33% Dec
ACSF 0.00 0.00 0.38 1.29 1.25 1.16 1.17 -3.10% -7.20% 0.86% 10.68 11.51 11.41 1.15 1.16 -0.86% Dec
AINV 0.83 0.83 0.91 0.82 0.84 0.63 0.64 2.44% -25.00% 1.59% 7.63 10.17 10.02 0.72 0.59 20.63% Mar
ARCC 1.65 1.64 1.43 1.54 1.61 1.45 1.66 4.55% -9.94% 14.48% 10.43 11.58 10.11 1.58 1.41 11.72% Dec
BKCC 1.00 0.78 0.91 0.97 0.98 0.82 0.83 1.03% -16.33% 1.22% 7.84 9.37 9.25 0.85 0.72 15.85% Dec
CMFN 0.00 0.00 1.17 1.48 1.29 1.13 1.07 -12.84% -12.40% -5.31% 8.10 9.25 9.77 1.14 1.12 1.77% Jun
CPTA 0.00 0.00 1.54 1.66 1.84 1.53 1.62 10.84% -16.85% 5.88% 7.36 8.85 8.36 1.65 1.51 9.15% Dec
FDUS 1.54 1.54 1.62 1.64 1.46 1.54 1.62 -10.98% 5.48% 5.19% 11.75 11.14 10.59 1.58 1.52 3.90% Dec
FSC 1.07 1.01 0.99 0.75 0.70 0.56 0.53 -6.67% -20.00% -5.36% 5.96 7.45 7.87 0.65 0.55 17.86% Sep
FSFR 0.00 0.00 0.96 0.96 0.82 0.74 0.76 -14.58% -9.76% 2.70% 9.63 10.68 10.39 0.80 0.80 0.00% Sep
FSIC 0.00 0.00 0.80 0.92 0.85 0.81 0.81 -7.61% -4.71% 0.00% 10.88 11.42 11.42 0.87 0.79 9.88% Dec
GAIN 0.62 0.68 0.73 0.75 0.75 0.74 0.73 0.00% -1.33% -1.35% 12.35 12.51 12.68 0.80 0.74 8.11% Mar
GARS 0.00 1.28 1.31 1.79 1.21 1.10 0.99 -32.40% -9.09% -10.00% 7.26 7.99 8.88 1.37 1.06 28.18% Dec
GBDC 1.15 1.29 1.26 1.26 1.27 1.25 1.28 0.79% -1.57% 2.40% 16.01 16.26 15.88 1.27 1.25 1.60% Sep
GLAD 0.91 0.88 0.87 0.84 0.85 0.84 0.85 1.19% -1.18% 1.19% 11.74 11.88 11.74 0.84 0.84 0.00% Sep
GSBD 0.00 0.00 1.77 2.04 2.14 1.96 2.01 4.90% -8.41% 2.55% 10.57 11.55 11.26 2.05 1.94 5.61% Dec
Earnings / Share Earn. Growth P/E Ratios Current Fiscal Year
Co. 2012 2013 2014 2015 2016 2017 2018 15to16 16to17 17to18 2016 2017 2018 High Low Range Yr End
HCAP 0.00 0.00 1.34 1.36 1.60 1.37 1.40 17.65% -14.38% 2.19% 8.14 9.51 9.31 1.38 1.35 2.19% Dec
HRZN 1.41 1.39 1.11 1.25 1.46 1.14 1.19 16.80% -21.92% 4.39% 7.60 9.73 9.32 1.22 1.09 11.40% Dec
HTGC 0.97 1.23 1.13 1.04 1.24 1.24 1.37 19.23% 0.00% 10.48% 10.66 10.66 9.65 1.35 1.16 15.32% Dec
KCAP 0.89 0.91 0.97 0.65 0.51 0.37 0.37 -21.54% -27.45% 0.00% 6.84 9.43 9.43 0.41 0.39 5.41% Dec
MAIN 2.01 2.02 2.20 2.18 2.24 2.24 2.27 2.75% 0.00% 1.34% 17.20 17.20 16.97 2.28 2.16 5.36% Dec
MCC 1.31 1.53 1.58 1.27 0.96 0.68 0.73 -24.41% -29.17% 7.35% 6.25 8.82 8.22 0.82 0.71 16.18% Sep
MRCC 0.00 1.16 1.55 1.60 1.61 1.47 1.59 0.63% -8.70% 8.16% 9.70 10.62 9.82 1.50 1.24 17.69% Dec
NMFC 1.35 1.52 1.41 1.39 1.36 1.36 1.37 -2.16% 0.00% 0.74% 10.74 10.74 10.66 1.40 1.34 4.41% Dec
OFS 0.65 0.62 0.99 1.40 1.46 1.35 1.48 4.29% -7.53% 9.63% 9.67 10.46 9.54 1.52 1.35 12.59% Dec
OHAI 0.55 0.64 0.61 0.37 0.32 0.37 0.43 -13.51% 15.62% 16.22% 4.59 3.97 3.42 0.37 0.37 0.00% Dec
PSEC 1.63 1.57 1.19 1.03 0.96 0.88 0.86 -6.80% -8.33% -2.27% 8.61 9.40 9.62 0.97 0.92 5.68% Jun
PFLT 1.01 1.10 1.12 1.08 1.09 1.09 1.17 0.93% 0.00% 7.34% 12.94 12.94 12.06 1.13 1.09 3.67% Sep
PNNT 1.08 1.01 1.06 1.10 0.97 0.86 0.81 -11.82% -11.34% -5.81% 7.74 8.73 9.27 0.93 0.82 12.79% Sep
SAR 1.86 1.86 1.85 1.80 2.04 1.98 2.00 13.33% -2.94% 1.01% 10.68 11.00 10.89 2.07 1.98 4.55% Dec
SCM 0.00 1.34 1.34 1.33 1.39 1.32 1.42 4.51% -5.04% 7.58% 10.12 10.65 9.90 1.36 1.22 10.61% Dec
SLRC 2.20 1.89 1.56 1.52 1.68 1.67 1.81 10.53% -0.60% 8.38% 13.05 13.13 12.11 1.76 1.63 7.78% Dec
SUNS 1.31 1.18 1.20 1.33 1.42 1.41 1.43 6.77% -0.70% 1.42% 12.12 12.21 12.03 1.43 1.40 2.13% Dec
TCAP 2.16 2.25 2.08 2.16 1.61 1.76 1.89 -25.46% 9.32% 7.39% 11.37 10.40 9.69 1.81 1.70 6.25% Dec
TCPC 1.81 1.63 1.56 1.63 1.50 1.53 1.58 -7.98% 2.00% 3.27% 11.36 11.14 10.78 1.57 1.47 6.54% Dec
TCRD 1.38 1.45 1.42 1.41 1.35 1.13 1.16 -4.26% -16.30% 2.65% 7.35 8.78 8.55 1.15 1.08 6.19% Dec
TICC 1.12 1.04 1.05 0.73 0.39 0.62 0.52 -46.58% 58.97% -16.13% 18.54 11.66 13.90 1.21 0.46 120.97% Dec
TPVG 0.00 0.00 1.30 1.44 1.47 1.53 1.48 2.08% 4.08% -3.27% 9.20 8.84 9.14 1.58 1.55 1.96% Dec
TSLX 1.36 1.66 2.07 1.77 1.83 1.81 1.78 3.39% -1.09% -1.66% 11.33 11.45 11.65 1.83 1.74 4.97% Dec
WHF 0.00 1.28 1.14 1.48 1.47 1.46 1.46 -0.68% -0.68% 0.00% 9.67 9.73 9.73 1.56 1.40 10.96% Dec
BDC Average -3.02 -5.45 2.33 10.05 10.55 10.35 10.93

A final summation:

This retired investor owns multiple BDCs (and predominantly safer BDCs) in order to pry loose nearly 4% annual income for a portfolio where I have the objective of never touching capital. Because I have close to 7.5% in BDCs, I can afford to own many near 1% yielding equities that should assist in reaching a near 5% year-over-year income growth from my portfolio. Right at 80% of the equities I own have debt that is rated investment grade. Close to all of my investments have high earnings projection accuracy.

I see PSEC as being high risk - and you have seen the metrics that justify that assessment. But you may want a portfolio where 95% of your equity investments are in companies with investment grade rated debt. If owning PSEC helps you reach that goal - then you should own PSEC.

On the other hand, I strongly suspect that most owners of PSEC are failing to focus on earnings quality. I suspect they may own lesser quality mortgage REITs, BDCs, MLPs or preferred shares. A retired person owning a high quality portfolio can afford to have a lone dividend implosion with PSEC. A retired person with multiple dividend imploding stocks is in danger of running out of nest egg before they run out of life span.

Whether or not PSEC is a buy for you depends on what you already own. Chances are, if you are learning a lot of new things about risk measurement in this series, you may not have the focus on risk assessment that you need to keep your next egg, thus PSEC is not for you. And chances are, if the series is confirming things you already suspected, then you may have the focus on risk in the rest of your portfolio, thus owning PSEC is an OK thing.

Disclosure: I am/we are long AINV, ARCC, FDUS, MRCC, PFLT, PNNT, TCPC.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.