Identifying Risk In BDCs - The Alcentra Capital Example

| About: Alcentra Capital (ABDC)
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Summary

In this series, I have produced numbers for some clear winners and some clear losers. It is time to get nebulous.

ABDC has a double-digit yield (10.21%) where predominantly bad companies have double-digit yields. ABDC has superior dividend coverage, which is a big deal.

Alcentra is part of the Bank of New York Mellon asset management group. Parentage and connections matter in this sector.

But ABDC has a bad NAV trend, a portfolio of high PWAY loans, poor portfolio diversification and a falling NII/TII ratio. All of those are important things too.

The purpose of this series on Business Development Companies, or BDCs, is to help you avoid the dividend declining companies, while capturing some much-needed income. The intro article in the series was "How To Identify Risk In BDCs." This article is on Alcentra Capital Corp. (NASDAQ:ABDC). This BDC sells at a 50 bps higher yield than average. Is that dividend yield correctly correlated to higher risks? Are you getting too much yield for the moderately higher risks? I will take you through the last several earnings releases, show the 23-point red flag checklist of assessing the quality of ABDC's income, show the relative valuations for the sector, and present my assessment of Alcentra Capital Corp.

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

Earnings Estimate from Yahoo Finance from before the earnings release

Current Qtr. (Mar 2017) Next Qtr. (Jun 2017) Current Year Next Year
No. of Analysts 5 5 5 4
Avg. Estimate 0.35 0.35 1.44 1.50
Low Estimate 0.31 0.32 1.35 1.35
High Estimate 0.37 0.37 1.53 1.69
Year-ago EPS 0.41 0.44 1.66 1.44
Revenue Estimate Current Qtr. (Mar 2017) Next Qtr. (Jun 2017) Current Year Next Year
No. of Analysts 4 4 4 3
Avg. Estimate 9.10M 9.20M 37.59M 41.67M
Low Estimate 8.86M 8.76M 35.46M 38.70M
High Estimate 9.22M 9.60M 38.75M 45.64M
Year-ago Sales 9.95M 10.64M 40.6M 37.59M

Reported NII (Net Investment Income)/share was $0.34. Reported revenue or TII (Total Investment Income) was $9.201 million. The bad news in the earnings release: NAV fell significantly from $13.72 to $13.43.

Below are the spreadsheets on the company's major financial and operating metrics:

Alcentra 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
Realized + Unrealized Gains -3,561,538 -1,195,769 -6,629,320 -4,503,177 -1,291.134 -6,577.824 -1,877.595 1,764.307 14.717 -1.505.377 3,306.153 - 264.414
Real + Unrealized Gains/share - $0.2650 - $0.0889 - $0.4914 - $0.3336 - $0.0955 - $0.4866 - $0.2388 $0.1305 $0.0011 - $0.1114 $0.2446 - $0.0196
Cap. gains incentive fee 0 0 0 0 0 0 -434,217 434.218 1,001,467
Cap. gains incentive fee/share 0 0 0 0 0 0 -0.0321 0.0321 0.0741
Income-based incentive fees 653,911 930,546 607,739 926,158 790,727 521,295 546,027 397,028 806,100
Income-based incentives/share 0.0487 0.0692 0.0451 0.0686 0.0585 0.0386 0.0404 0.0294 0.0596

In 3 out of 12 quarters, the number on gains has been positive. This is a worse-than-average record. On the other hand, the last year change in NAV has been -9.01% (an ugly number), which still beats the sector average of -10.41%.

Alcentra 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
Interest income 7.663 9.057 7.532 6.338 6.560 7.203 6.723 5.858 5.953 5.082 3.667 2.725
PIK interest income 0.902 0.999 1.038 1.805 2.362 1.062 1.309 2.003 1.546 1.951 0.763 0.906
Other income 0.610 1.164 0.158 2.498 1.023 0.412 0.475 0.342 0.727 -.565 1.056 0.000
Total investment income 9.201* 10.900* 9.116 10.640 9.946 8.677 8.507 8.507* 8.225 6.670* 5.861* 3.635
* Quarters where ABDC also had "dividend" income

BDCs with high percentages (over 5%) of PIK income tend to have NAV problems. ABDC's PIK percentage has been over 10% in 10 of the last twelve quarters but under 10% in the last two. "Other income" has been volatile, which makes the TII number volatile.

Alcentra Capital Corporation Q1-20 Q4-16 Q3-2016 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 9.201 10.900 9.116 10.640 9.946 8.677 8.507 8.507 8.225 6.670 5.861 3.635 3.995 3.436
Net investment income 4.593 6.119 4.787 5.898 5.605 4.530 5.142 4.649 4.977 4.551 4.596 2.455 3.176 2.315
Investments @ fair value 0.283 0.276 0.306 0.294 0.282 0.296 0.289 0.285 0.267 0.259 0.214 0.200
Wt. Avg. Share Count 13.439 13.452 13.490 13.500 13.515 13.517 13.517 13.517 13.517 13.517 13.517 13.517
TII/share $0.6847 $0.8103 $0.6758 $0.7881 $0.7359 $0.6419 $0.6294 $0.6293 $0.6085 $0.49 $0.43 $0.27
NII/share $0.3418 $0.4549 $0.3549 $0.4369 $0.4147 $0.3351 $0.3804 $0.3439 $0.3682 $0.34 $0.34 $0.18
Div/share $0.34 $0.37 $0.34 $0.34 $0.34 $0.34 $0.34 $0.34 $0.34 $0.34 $0.34
NAV/share $13.43 $13.72 $13.69 $14.16 $14.41 $14.43 $14.92 $15.03 $14.90 $14.87 $15.00 $14.76
Wt. Avg. Yield 11.7% 11.7% 11.8% 11.7% 12.0% 12.4% 12.2% 12.1% 12.0% 11.9% 11.7% 11.9% 12.2% 12.2%
Portfolio Leverage 3.65x 3.93x 4.34x 3.88x 3.86x 3.72x 3.70x 3.38x 3.50x 3.31x 3.30x 3.51x 3.58x 3.60x
Leverage numbers are recently from the time of the earnings release. There have been ex post facto changes in those numbers.
# Portfolio Companies 31 32 35 33 31 32 29 29 28 28 24 21
NII/TII Ratio 49.9% 56.1% 52.5% 55.4% 56.4% 52.2% 60.4% 54.6% 60.5% 68.2% 78.4% 67.5%
Oil/Gas % of Portfolio 5.55% 5.46% 4.91% 4.99% 5.22% 6.73% 6.43% 6.41% 6.51% 6.49% 6.99% 7.40%
Alcentra has no mention of CLOs or structured products in its 10-Qs. The oil investment is in a rig rental company.

The 37 cent dividend earned in Q4-16 and paid in Q1-17 contained three cents of special dividends. As a good rule of thumb, BDCs that pay special dividends do not cut their dividends. This is more of an omen that a metric based rule. $0.34/quarter of NII appears to be a good run rate number for quarters with low amounts of "other income" - and that matches the dividend. The weighted average yield has been stable.
Another good omen - the current portfolio company Debt/EBITDA ratios (the "portfolio leverage" number) of 3.65x is relatively low. For example: ARCCs number is 5.3x; FSIC's in the high 4s; GARS 3.7x; GSBD 4.6x; NMFC 5.0x; PSEC 4.1x; PFLT 3.7x; PNNT 4.9x; and TCRD 4.5x. I am wary of the low numbers of portfolio investments. But I am willing to still own such a BDC when I own it in atypically small weightings.

Alcentra 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
Debt 100.534 92.638 124.323 102.790 80.085 103.161 93.899 78.835 63.045 62.715 27.254 22.695
Debt/share 7.4808 6.8866 9.2159 7.6141 5.9256 7.6319 6.9467 5.8323 4.6641 4.6397 2.0163 1.6790
Debt/share to NAV 55.70% 50.19% 67.32% 53.77% 41.12% 52.89% 45.56% 38.80% 31.30% 31.20% 13.44% 11.38%
Interest expense 1.527 1.537 1.777 1.618 1.574 1.530 1.428 1.269 0.789 0.421 0.377
Interest expense/share 0.1136 0.1143 0.1317 0.1199 0.1164 0.1132 0.1056 0.0939 0.0584 0.0312 0.0279
Interest expense/TII 16.60% 14.10% 19.49% 15.21% 15.82% 17.63% 16.79% 14.92% 9.59% 6.31% 5.75%
Annualized Int. exp/Debt 6.07% 6.64% 5.72% 6.30% 7.86% 5.93% 6.08% 6.44% 5.01% 2.69% 4.94%
PWAY - Int. exp/Debt 563 bps 506 bps 608 bps 540 bps 414 bps 647 bps 612 bps 556 bps 699 bps 921 bps 676 bps
Debt consists of $50.1 million in 6.39% WAY InterNotes with maturities starting in 2020 + facility debt of $50.5 million at LIBOR + 2.25
Alcentra Capital InterNotes debt began with the first issuance in January 2015.

I did not like the NII/TII ratio in the prior spreadsheet. This spreadsheets shows that as the Debt/NAV rises, the interest expense to TII rises - and thus, the NII/TII ratio falls. The cost of the debt is relatively high, while the degree of leverage is relatively low.

The Red Flag Checklist For ABDC - Where a fail is worse than average metric.

(1) Well-covered dividend - The annual dividend is $1.36, while the 2017 projection is $1.44 and the 2018 projection is $1.50. Grade = A.
(2) A Rising NAV - ABDC is a fail with a -6.80% LTM NAV change.
(3) A BDC with a lower-than-sector-average Portfolio Company Weighted Average Yield - ABDC's PWAY = 11.70%, compared to the sector average of 10.90%. Grade = Fail.
(4) High income projection accuracy when looking at the annual NII numbers. Grade = A.
(5) Lower revenue volatility when comparing the quarterly TII numbers. There is volatility due to spikes in earnings, not due to drips in earnings. Grade = Pass.
(6) Has lower yields on its IOUs (under 5%). Alcentra Capital is part of "Bank of New York Mellon" asset management, and one would think such parentage or associations mattered. But the average interest rate on debt is 6.07%. 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. The PWAY is well below TII/Portfolio percentage, resulting in a low ball projection. Grade = Context-based Pass.
(8) A dividend/NAV ratio that is 200 bps lower than the PWAY. The spread is only 160 bps based on PWAY, but it is 290 based on the TII/Portfolio. Grade = Context-based Pass.
(9) BDCs with close to the same PWAY sell at an average yield of 9.62%, compared to ABDC's 10.21%. Grade = Pass.
(10) BDCs with 93-100% Dividend/EPS ratios sell at an average yield of 9.04%. Grade = Pass.
(11) BDCs with negative NAV trends sell at higher yields than ABDC. Grade = Fail.
(12) Has more than 75 portfolio company investments. ABDC has 31. Grade = Fail.
(13) A debt/NAV ratio that is lower than 80%. ABDC's ratio is 55.70% - it has been low since the IPO. Grade = Pass.
(14) An NII/TII ratio over 50%. ABDC's ratio is 49.9% and falling. Due to the trend, Grade = Fail.
(15) A better-than-sector-average trend in "gains." In 3 out of 12 quarters, the number on gains has been positive. Grade = Fail.
(16) Influence on NAV of secondary offerings or share buybacks. Not applicable - ABDC will not report the effect of the recent secondary until the next quarter.
(17) Reports debt/EBITDA and interest coverage ratio numbers on its portfolio companies. ABDX only reports Debt/EBITDA. Grade = Pass.
(18) Transparency on the amount of accelerated amortization of upfront fees and prepayments. Grade = Fail.
(19) Reports Q4 numbers. Grade = Pass.
(20) No secondary offerings below NAV. Grade = Pass. ABDC had a secondary offering at $13.68 on 5/17/17, compared to its NAV of $13.43.
(21) Has less than 5% in structured products or CLOs. Grade = Pass.
(22) Income that comes from PIK, or payment in kind, income less than 5% of income. ABDC does not report having CLOs.
(23) Energy loans less than 5% share of portfolio. In Q1-17, the percentage was 5.55%. The energy company rents drilling rigs. This loan is being marked up as that market improves. Grade = Incomplete.

ABDC fails, small fails or has an incomplete on (2, 3, 6, 11, 12, 14, 15, 18, 23) 9 of the 23 points. Many of the green flags were due to valuation. Bad BDCs have fails in the mid-teens. Good BDCs in the low single digits, and their red flags come from valuations.

With the checklist now done, the issues now become, "How attractive are the valuations?" and "How much do I want the higher yield?" Let me show my math on two of the above points, and then show the sector numbers, before we touch on those last two questions.

Showing the math for point 7:

Total Investment Income (Equity investments are 12.57% of the portfolio)
Metric Fee Income Interest Income Totals
Formula Average for last 4 quarters Portfolio times yield / 4 Sum of components
Numbers 1.107 87.43% of 283 million times .117 / 4 8.344
The TII/Portfolio ratio has been sporadically well above the PWAY - a potential cause for my projection being low.
TII volatility has been due to oscillating earnings surprises followed by no surprises.
Net Investment Income Historical projection accuracy is very good, while TII volatility is very high,
Metric NII/TII Ratio NII NII/share Result
Formula average for last year TII times NII/TII NII/ share count
Numbers 53.47% .5347 times 8.344 4.461 / 13.439 $0.3320/share
The consensus analyst 2017 TII projection is (37.59 / 4) 9.397 and NII projection is ($1.44 / 4) $0.36/share/quarter.

Showing the numbers for point 8:

Dividends, NII/share, NAV/share, the annualized Div/NAV Ratio and Portfolio Weighted Average Yield

2012 2013 2014 2015 2016 2017
ABDC 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
Dividend 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.34 0.34 0.34 0.34 0.34 0.34 0.34 0.34 0.34 0.34 0.34 0.34 0.34
NII/share 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.17 0.19 0.18 0.34 0.34 0.37 0.34 0.38 0.34 0.41 0.44 0.35 0.45 0.34
NAV 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 14.76 14.76 15.00 14.87 14.90 15.03 14.92 14.43 14.41 14.16 13.69 13.72 13.43
Dividend/NAV N.A. N.A. N.A. N.A. N.A. N.A. N.A. N.A. 0.0 9.2 9.1 9.1 9.1 9.0 9.1 9.4 9.4 9.6 9.9 9.9 10.1
Port. Wt. Avg. Yield 0.0 0.0 0.0 0.0 0.0 12.2 11.9 11.7 11.9 12.0 12.1 12.2 12.4 12.0 11.7 11.8 11.7 11.7
TII/Portfolio 8.0 7.3 11.0 9.6 12.3 11.9 11.8 11.7 14.1 14.5 11.9 15.8 13.0

I really like the above spreadsheet (as you should be able to tell from my prior articles), because the data within talks to me. NII is consistently over the dividend. I do not believe there is any trend in the NII. There will be random quarters where a high component of fee or other income will result in a superior NII number.

I am concerned about the rising Dividend/NAV number. With BDCs that have cut their dividend before, one has some history to confirm the dangerous thresholds. Ironically, with ABDC having never cut the dividend (a good thing), we lack that kind of confirmation (a bad thing).

I will go with a two rules of thumb that: (1) BDCs slow to cut their dividend the first time; and (2) Because it is the first time, the TII/Portfolio ratio will be the better trigger for a cutting event than the PWAY.

I will make an educated guesstimate the danger zone in the Dividend/NAV ratio will be 12.5%. A fear of a dividend cut will begin to be reflected in ABDC's price once the ratio hits 11.7% and NII has been below the dividend for two straight quarters. Put differently, after those two bad thresholds are met, the valuation should begin to fall and you are in the "too late to sell" zone. But, if the analysts are right, NII is not headed in that wrong direction.

Bottom line, one should have ample time to exit if ABDC fails to perform as expected. I believe I have shown you ample evidence that you should be using these metrics to assess dividend safety. At the same time, very few other investors appear to be using those metrics, because they are following borrowed opinions.

Add to that, ABDC is projected to be growing NII, and it has a superior record on earnings projection accuracy. That is an attractive combination of attributes that I am placing on the bottom line.

Let move on to the current valuations.

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
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 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 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 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 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 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. 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. 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 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. 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 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. 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. 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 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 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 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. 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
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 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. 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 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 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 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. 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 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 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 PSEC 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 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. 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. 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 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. 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. 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. 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. 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. 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 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 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 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 -10.41
With the 10-year 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 and 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 dividend by the consensus estimate, and serves as one of several measurements for assessing risk. Almost all EPS projections are from Yahoo Finance. I do not have 2018 analyst projections for OFS, OHAI and TPVG.

Earnings / Share Earnings 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 Earnings 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

For year to date 2017, ABDC is outperforming the sector average with a price gain of 11.28%, compared to the sector average of my coverage universe of 2.14% and a fall in price of the BDC index ETF (NYSEARCA:BDCS) of 0.88%.

For 2016, ABDC underperformed the sector average with a price gain of 3.19%, compared to the sector average of my coverage universe of 6.58% and a gain in price of the BDC index ETF of 11.88%.

For 2015, ABDC outperformed the sector average with a price loss of 7.20%, compared to the sector average of my coverage universe fall of 12.30% and a fall in the price of the BDC index ETF of 11.37%. ABDC IPOed on May 9, 2014 at $15.00 and began 2015 with a price of $12.50.

My assessment of ABDC

Instead of telling you what to do, I am going to tell you what I am going to do. I am going to wait two quarters and only act on ABDC if I see a significant change in the NAV trend. I will only purchase a light weighting. I have a plan. I have a light weighting in Apollo Investment Corporation, which has an LTM NAV change of -7.42%. I should generate a decent tax loss on that potential sale. If (1) ABDC has a 100 bps advantage on the NAV trend; (2) two more quarters of NII are above the dividend; and (3) the valuation picture has not significantly changed, then I expect to be buying ABDC while continuing to watch it very closely.

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.