Don't Fall For This BDC Lie

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Includes: ABDC, ACSF, AINV, ARCC, BKCC, CCT, CGBD, CMFN, CPTA, FDUS, FSIC, GAIN, GARS, GBDC, GLAD, GSBD, HCAP, HRZN, HTGC, KCAP, MAIN, MCC, MRCC, NMFC, OCSI, OCSL, OFS, OHAI, OXSQ, PFLT, PNNT, PSEC, SAR, SCM, SLRC, SUNS, TCAP-OLD, TCPC, TCRD, TPVG, TSLX, WHF
by: Factoids
Summary

Net Asset Value is NOT always fair value.

A share price less than net asset value is NOT a 'discount'.

This article will provide a very long list of data parsing sets that will justify those findings.

On 4/15/18 Pandora Capital wrote that Apollo or AINV had "20%+ Share Price Upside" partially because AINV sold at only at 0.82x to book value while its peer average was 1.04x.

On 3/10/18 Rida Morwa wrote that AINV was "selling at a 21% discount" with "a 15% upside potential" because AINV is morphing towards safer assets.

On 4/01/18 Achilles Research wrote that "The discount to NAV implies a higher margin of safety for investors."

On 1/31/18 Jim Roumell wrote of Medley or MCC "Discount To NAV Remains But Not For Long". At the time, MCC was trading at $5.75; paying a $0.16/share per quarter dividend; with a NAV of $7.71. At this time, MCC is trading at $3.55; paying a $0.10/share per quarter dividend; with a NAV of $7.02.

On 4/05/17 Blue Harginger wrote "Medley Capital: This 11.5% Yield BDC Is Worth Considering". At the time, MCC was trading at $7.55; paying a $0.16/share per quarter dividend; with a NAV of $9.39. "Medley is very likely to continue paying big dividends for many years to come. And even if the company is forced to lower its dividend again, it will likely be a moderate reduction that has little impact on the share price (just as last summer's dividend cut had no real negative impact), especially considering Medley's price is already discounted versus its book value and compared to its peers."

On 9/04/16 Richard Lejeune wrote in "Top 10 Reasons To Consider This 14.2% Yielder" that "Capital gains are possible if KCAP trades higher towards NAV. The Closed-End Fund Advisors BDC Universe shows that KCAP trades at a larger discount than about 2/3 of its BDC peers. KCAP's discount is especially notable given that it's internally managed and has such high quality assets. At the time, KCAP was trading at $3.41; paying a $0.12/share per quarter dividend; with a NAV of $5.10. At this time, KCAP was trading at $3.17; paying a $0.10/share per quarter dividend; with a NAV of $4.85.

Just to show that I am also fallible, I wrote a bullish article on THL Credit (NASDAQ:TCRD) on 11/10/16 because its valuation was too low compared to BDCs with similar attributes - and TCRD has announced a shift towards having a higher weighting in better quality assets. TCRD's attributes (its TII, NII and NAV trends) continued to fall. At the time, TCRD was trading at $9.23; paying a $0.27/share per quarter dividend; with a NAV of $11.84. At this time, TCRD is trading at $7.80; paying a $0.27/share per quarter dividend; with a NAV of $10.44.

I find in the above listed articles a theme.
(1) That net asset value is fair value.
(2) That a lower share price than net asset value is a discount.
(3) That given enough of a discount, one can overlook some faults.
It is the combination of those three ideas that I am calling "the lie".

"The Truth" can be summarized by these ideas. BDCs that are trading at a price lower than its NAV strongly tend to have negative metric attributes that justify that difference.

This article is written for those who see a discount when you look at the valuations of BDCs such as the aforementioned AINV, KCAP, MCC and TCRD. I have the hope and expectation that the large load of data that follows assists in seeing justification for those alleged discounts.

I have read several times over the years the NAV discounts offer "a margin of safety". But to get that alleged safety, it strongly is the case that you end up buying a BDC that is higher risk based on several other metrics.

It could be that it is your impression that if the NAV is falling, then the BDC only has one problem. Historical numbers strongly indicate that is not the case. If NAV is falling, then it strongly is the case that total investments are falling, total investment income is falling and net investment income is falling.

This article will provide a very long list of data parsing sets that will show to what degree varying (1) dividend coverage, (2) NAV trends, (3) PWAYs, (4) NII/TII ratios, (5) PIK/TII ratios and (6) Cost of Debt have on Price/Book ratios. It is my perception that attributes lead to outcomes. Exposure to this data may lead to you having the same perception. I am first going to show my current sector data in two different formats, then begin with the data parsing sets. Let's get started.

BDCs053018

Yield in the spreadsheet below is based on the Q2-18 '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, price plus dividends, consensus analysts earnings projections and price target YTD. For the last four columns - the first measures the percentage change in the Q2-18 dividend from the Q2-17 dividend; the change in NAV between Q4-17 and Q4-16; the percentage change in the Q2-18 dividend from the Q2-15 dividend; the change in NAV between Q1-18 and Q1-15 and the change in NII from actual 2015 to projected 2018. Special dividends (paid by CGBD, GBDC, MAIN + TSLX) are not included in this data.

BDCs 05-30-18

Share Price Div/ Div/ Div/ Div/ Q1-18 Price YTD Percent Change LTM % LTM % Last Three Years
___The_Company_name_and_stock_ticker___ 1-01 05-30 Yield PWAY EPS18 EPS19 NIIltm NAV NAV /NAV Price Pr+Div EPS Target DivChng NAVChng DivChng NAVChng NIIChng
Alcentra Capital Corporation (ABDC) 8.39 6.82 10.56 10.60 83.7 91.1 57.8 6.4 11.22 0.61 -18.71 -14.42 -15.69 -21.05 -47.06 -16.46 -47.06 -24.70 -39.86
American Capital Senior Floating (OTC:ACSF) 10.52 12.30 9.46 7.15 107.8 99.5 118.3 8.9 13.11 0.94 16.92 19.69 -6.90 0.00 0.00 -4.03 0.00 -9.65 -16.28
Apollo Investment Corporation (AINV) 5.66 5.74 10.45 10.70 95.2 87.0 98.3 9.1 6.56 0.88 1.41 6.71 -4.55 -0.62 0.00 -4.37 -25.00 -19.80 -23.17
Ares Capital Corporation (ARCC) 15.72 16.81 9.04 10.10 95.6 91.0 114.4 9.0 16.84 1.00 6.93 9.35 1.27 0.56 0.00 2.06 0.00 0.78 3.25
BlackRock Capital Investment (BKCC) 6.23 6.20 11.61 11.30 96.0 92.3 100.6 9.4 7.65 0.81 -0.48 5.30 0.00 -6.90 0.00 -6.93 -14.29 -27.69 -22.68
Corporate Capital Trust (CCT) 15.98 16.52 9.73 9.60 98.7 95.1 104.1 8.2 19.72 0.84 3.38 5.89 -6.86 -1.69 -10.67 -2.62 na -10.04 -2.98
Carlyle Group BDC (CGBD) 20.04 18.09 8.18 9.31 90.8 87.1 87.0 8.2 18.09 1.00 -9.73 -6.04 1.87 -1.71 -9.76 -1.15 0.00 -5.04 13.99
CM Finance Inc (CMFN) 8.15 9.45 10.58 11.12 97.1 91.7 98.4 8.0 12.55 0.75 15.95 22.09 3.00 -4.55 0.00 1.87 -27.95 -12.97 -30.41
Capitala Finance Corp. (CPTA) 7.28 8.26 12.11 12.00 91.7 90.9 117.6 7.3 13.66 0.60 13.46 16.90 -1.80 -2.60 -35.90 -13.05 -46.81 -25.56 -34.34
Fidus Investment Corporation (FDUS) 15.18 14.43 10.81 12.70 109.1 100.0 112.6 9.6 16.28 0.89 -4.94 -2.37 -8.92 -6.21 0.00 3.04 2.63 7.18 -12.80
Oaktree Specialty Lending (OCSL) 4.89 5.00 10.00 9.10 128.2 113.6 118.6 8.5 5.87 0.85 2.25 4.81 -26.42 -4.24 0.00 -18.81 -30.56 -36.06 -48.00
Oaktree Strategic Income (OCSI) 8.40 8.30 9.16 7.90 122.6 115.2 106.7 7.6 9.99 0.83 -1.19 1.07 -18.42 0.00 0.00 -7.76 -36.67 -19.82 -35.42
Franklin Square Investment Corp (FSIC) 7.35 7.68 9.90 10.90 95.0 92.7 94.4 8.3 9.16 0.84 4.49 9.66 1.27 -7.20 -14.80 -3.07 -14.80 -7.47 -13.04
Gladstone Investment Corporation (GAIN) 11.16 11.49 6.79 13.10 101.3 98.7 114.8 7.2 10.85 1.06 2.96 5.29 2.67 12.58 1.56 9.05 8.33 18.19 2.67
Garrison Capital Inc. (GARS) 8.11 8.73 12.83 10.00 103.7 114.3 103.9 9.6 11.69 0.75 7.64 11.10 4.85 2.04 0.00 -1.76 -20.00 -24.14 -39.66
Golub Capital BDC, Inc. (GBDC) 18.20 18.63 6.87 8.20 99.2 97.7 103.4 7.9 16.11 1.16 2.36 4.12 0.78 1.03 0.00 1.45 0.00 3.20 2.38
Gladstone Capital Corporation (GLAD) 9.21 9.10 9.23 11.50 97.7 96.6 99.9 9.7 8.62 1.06 -1.19 -0.43 0.00 0.00 0.00 1.06 0.00 -9.74 2.38
Goldman Sachs BDC (GSBD) 22.18 20.64 8.72 11.50 92.8 89.6 87.9 9.9 18.10 1.14 -6.94 -2.89 -0.51 -4.98 0.00 -0.88 0.00 -6.85 -4.90
Harvest Capital Credit (HCAP) 10.96 10.19 13.25 11.40 118.4 117.4 120.4 10.6 12.70 0.80 -7.03 -3.95 -14.93 -8.77 0.00 -8.57 0.00 -11.19 -16.18
Horizon Technology Finance Corp (HRZN) 11.22 9.99 12.01 14.40 107.1 106.2 113.8 10.3 11.65 0.86 -10.96 -8.29 2.75 -3.70 0.00 -3.80 -13.04 -17.90 -10.40
Hercules Capital (HTGC) 13.12 12.44 9.97 11.90 99.2 91.9 103.6 12.8 9.72 1.28 -5.18 -2.82 -2.34 -0.82 0.00 -0.41 0.00 -7.16 20.19
KCAP Financial,Inc. (KCAP) 3.41 3.17 15.14 9.80 141.2 133.3 174.5 9.9 4.85 0.65 -7.04 0.00 3.03 -17.65 0.00 -5.64 -42.86 -32.26 -47.69
Main Street Capital Corporation (MAIN) 39.73 38.49 5.92 9.23 91.2 89.4 93.1 9.6 23.67 1.63 -3.12 -1.21 5.93 1.07 2.70 5.48 8.57 8.23 14.68
Medley Capital Corporation (MCC) 5.22 3.56 17.98 10.40 164.1 139.1 120.4 9.1 7.02 0.51 -31.80 -28.74 -39.06 -32.53 -27.27 -21.48 -46.67 -39.90 -69.29
Monroe Capital Corporation (MRCC) 13.75 14.07 9.95 10.00 91.5 89.7 96.6 10.4 13.49 1.04 2.33 4.87 4.08 -6.21 0.00 -5.93 0.00 -4.39 -4.38
New Mountain Finance Corp (NMFC) 13.55 13.82 9.84 11.10 98.6 100.0 98.6 10.0 13.60 1.02 1.99 4.50 0.00 -1.99 0.00 0.29 0.00 -2.09 -0.72
OFS Capital Corporation (OFS) 11.90 11.14 12.21 12.57 107.9 98.6 110.6 9.9 13.67 0.81 -6.39 -3.53 -2.33 -1.00 0.00 -8.74 0.00 -4.00 -10.00
Oak Hill Advisors (OHAI) 1.15 1.57 5.10 14.10 133.3 133.3 218.0 3.3 2.43 0.65 36.52 40.00 -40.00 0.00 0.00 -19.54 -83.33 -66.57 -83.78
Prospect Capital Corporation (PSEC) 6.74 6.77 10.64 12.90 94.7 93.5 93.7 7.8 9.23 0.73 0.45 3.12 5.56 4.55 -28.00 -2.12 -28.00 -10.39 -26.21
PennantPark Floating Rate Capital (PFLT) 13.72 13.64 8.36 7.86 108.6 96.6 107.1 8.2 13.98 0.98 -0.58 2.95 -2.78 -2.76 0.00 -0.50 0.00 -2.24 -2.78
PennantPark Investment Corp (PNNT) 6.91 7.29 9.88 11.50 97.3 93.5 96.9 8.0 9.00 0.81 5.50 10.71 1.37 -10.59 0.00 -0.99 -35.71 -12.20 -32.73
Saratoga Investment Corp. (SAR) 22.37 22.85 8.75 11.10 89.7 87.0 94.6 8.7 22.96 1.00 2.15 4.38 -3.04 2.27 8.70 4.51 85.19 1.15 23.89
Stellus Capital Investment (SCM) 13.14 12.90 10.54 11.10 107.1 96.5 115.6 9.6 14.12 0.91 -1.83 0.76 -5.93 -1.48 0.00 2.02 0.00 0.64 -4.51
Solar Capital Ltd. (SLRC) 20.21 21.46 7.46 10.20 87.4 83.8 95.4 7.3 21.87 0.98 6.19 8.16 2.81 -1.50 0.00 0.55 0.00 -0.18 20.39
Solar Senior Capital Ltd. (SUNS) 17.76 16.67 8.46 8.90 100.0 99.3 100.0 8.4 16.84 0.99 -6.14 -2.17 -1.40 1.41 0.00 0.18 0.00 -4.59 6.02
Triangle/Barings BBDC (TCAP-OLD) 9.49 11.26 10.66 11.00 169.0 121.2 85.3 9.0 13.36 0.84 18.65 21.81 -48.18 9.30 -33.33 -12.62 -44.44 -14.58 -67.13
TCP Capital Corp. (TCPC) 15.28 14.81 9.72 11.00 92.3 89.4 85.9 9.7 14.90 0.99 -3.08 -0.72 -1.27 -3.72 0.00 -0.13 0.00 -0.86 -4.29
THL Credit, Inc. (TCRD) 9.05 7.84 13.78 11.00 98.2 103.8 91.0 10.3 10.44 0.75 -13.37 -10.39 0.92 -14.38 0.00 -10.85 -20.59 -20.91 -21.99
Oxford Square Capital Corp. (OXSQ) 5.74 7.11 11.25 11.40 119.4 121.2 134.3 10.5 7.60 0.94 23.87 27.35 9.84 3.20 0.00 0.93 -31.03 -12.84 -8.22
TriplePoint Venture Growth (TPVG) 12.69 12.68 11.36 10.50 96.6 92.9 99.5 10.8 13.34 0.95 -0.08 5.59 4.20 -3.62 0.00 -0.30 0.00 -7.87 3.47
TPG Specialty Lending (TSLX) 19.80 18.80 8.30 11.20 80.4 82.1 76.1 9.6 16.27 1.16 -5.05 -3.08 7.78 -2.24 0.00 1.43 0.00 4.29 9.60
WhiteHorse Finance (WHF) 13.42 14.25 9.96 14.30 94.0 95.3 100.2 9.9 14.30 1.00 6.18 11.48 6.34 1.79 0.00 3.62 0.00 -4.67 2.03

Sector Average 10.15 10.85 104.6 9.0 0.91 0.87 4.21 -4.31 -3.21 -3.45 -11.25 -14.50
The 10 Treasury began 2018 at 2.405% and sector average yield on Q4 dividends began 2018 at 10.27% - the spread was 786 bps.
With the 10 Treasury at 2.79% and sector average yield on Q2 dividends at 10.15% - the spread is 736 bps.
The cap weighted ETN BDCS has a price change of -2.70% year to date - with dividends its total return is 1.31%.
The SPY or S&P 500 EFT is 0.81% year to date. - and with unreinvested dividends is 1.22% year to date.

The evidence that the Dividend/EPS Ratio influences Valuations: Dividend to EPS ratios range from as low as the 70s to 120s (at 05-18-18) and may look all too random. But this ratio - during almost all time periods - helps explain the variety of yields, price to book ratios, and price to NII ratios. There is often a correlation to YTD price changes as well. This first test is done for BDCs with weighted average portfolio yields of more than 10% in Q1-18. The dividend stats are from Q2-18 and the current EPS projections (technically - they are Dividend to NII or Net Investment Income) are for 2018 and 2019. The source of the projections are Yahoo Finance. LTM Dividend cutting BDCs are not included in this data. Lower risk BDCs have their metrics shown separately.

The following dividend paying BDCs had Q2-18 Dividend/EPS ratios of less than 93%: GSBD, MAIN, MRCC, SAR, SLRC, TCPC and TSLX. Their YTD mean price change = -1.08% and 3 of the 7 beat the sector mean yearly price change of 0.87%. Their mean yield = 8.38% compared to a PWAY of 10.60% - they sold at an average Price/Book ratio = 1.13x and an average Price/NII ratio = 10.91. They had an average analyst rating (from Yahoo Finance) of = 2.0 a LTM NAV change of 0.72% and Last Three Year NAV change of 0.20%.

The following BDCs had Q2-18 Dividend/EPS ratios of more than 93% - but less than or equal to 100%: AINV, ARCC, BKCC, CMFN, GLAD, HTGC, NMFC, PNNT, TCRD, TPVG and WHF. Their YTD mean price change = 1.61% and 6 of the 11 beat the sector mean yearly price change. Their mean yield = 10.52% compared to a PWAY of 11.37% - they sold at an average Price/Book ratio = 0.94x and an average Price/NII ratio = 9.33. They had an average analyst rating of = 2.3 had a LTM NAV change of -1.36% and Last Three Year NAV change of -11.18%.

The following companies had Q2-18 Dividend/EPS ratios of more than 100% but had 2019 Dividend/EPS ratios under 100%: FDUS, GAIN, OFS and SCM. Their YTD mean price change = -2.55% and 1 of the 4 beat the sector mean yearly price change. Their mean yield = 10.09% compared to a PWAY of 12.37% - they sold at an average Price/Book ratio of 0.92x and an average Price/NII ratio of 11.00. They had an average analyst rating of = 1.9 a LTM NAV change of 1.34% and Last Three Year NAV change of -25.23%.

The following companies had Q2-18 Dividend/EPS ratios of more than 100% and 2019 Dividend/EPS ratios of more than 100%: OCSL, GARS, HCAP, HRZN, KCAP, MCC, TCAP and OXSQ. Their YTD mean price change = -0.55% and 4 of the 8 beat the sector mean yearly price change. Their mean yield = 12.89% compared to a PWAY of 10.94% - they sold at an average Price/Book ratio of 0.77x and an average Price/NII ratio of 10.46. They had an average analyst rating of = 3.0 a LTM NAV change of -8.97% and Last Three Year NAV change of -23.61%.

The BDCs that had weighted average portfolio yields of less than 9% and dividend coverage (the lower risk group): GBDC and SUNS. Their YTD mean price change = -1.89% and 1 of the 2 beat the sector mean yearly price change of 0.87% Their mean yield = 7.66% compared to a PWAY of 8.55% - they sold at an average Price/Book ratio = 1.07x and an average Price/NII ratio = 13.13. They had an average analyst rating of = 2.3 a LTM NAV change of 0.81% and Last Three Year NAV change of -0.69%.

The BDCs that had weighted average portfolio yields of less than 9% but lacked dividend coverage: ACSF, OCSI and PFLT. Their YTD mean price change = 5.05% and 1 of the 3 beat the sector mean yearly price change. Their mean yield = 8.99% compared to a PWAY of 7.64% - they sold at an average Price/Book ratio = 0.91x and an average Price/NII ratio = 12.59. They had an average analyst rating of = 2.7 a LTM NAV change of -4.09% and Last Three Year NAV change of -10.57%.

Summation - NII coverage of the dividend has a major impact on current valuations.

The evidence that the LTM NAV Trends can explain Valuations: NAV trends influence Price/NAV ratios and Price/NII ratios. There is often a correlation to YTD price changes as well.

The following BDCs had LTM Positive NAV change over 1%: ARCC, CMFN, FDUS, GAIN, GBDC, GLAD, MAIN, SAR, SCM, TSLX and WHF. Their YTD mean price change = 1.85% and 6 of the 11 beat the sector mean yearly price change of 0.87%. Their mean yield = 8.80% compared to a PWAY of 11.24% - they sold at an average Price/Book ratio = 1.05x and an average Price/NII ratio = 11.34. They had an average analyst rating of = 2.1 a LTM NAV change of 3.23% and Last Three Year NAV change of 1.48%.

The following BDCs had Q1-18 LTM NAV change less than 1% but more than a 2% loss: CGBD, GARS, GSBD, HTGC, NMFC, PFLT, PNNT, SLRC, SUNS, TCPC, OXSQ and TPVG. Their YTD mean price change = 1.12% and 5 of the 12 beat the sector mean yearly price change. Their mean yield = 9.67% compared to a PWAY of 10.43% - they sold at an average Price/Book ratio = 0.98x and an average Price/NII ratio = 10.40. They had an average analyst rating of = 2.2 a LTM NAV change of -0.35% and Last Three Year NAV change of -7.17%.

The following BDCs had Q1-18 LTM NAV change of between a 2% loss and a 6% loss: ACSF, AINV, CCT, FSIC, HRZN, KCAP, MRCC and PSEC. Their YTD mean price change = 1.37% and 5 of the 8 beat the sector mean yearly price change. Their mean yield = 10.91% compared to a PWAY of 10.68% - they sold at an average Price/Book ratio = 0.85x and an average Price/NII ratio = 9.57. They had an average analyst rating of = 2.7 a LTM NAV change of -3.95% and Last Three Year NAV change of -13.99%.

The following companies had more than a 6% loss on LTM NAV change ABDC, BKCC, CPTA, OCSL, OCSI, HCAP, MCC, OFS, OHAI, TCAP and TCRD. Their YTD mean price change = -0.73% and 4 of the 11 beat the sector mean yearly price change. Their mean yield = 11.49% compared to a PWAY of 11.03% - they sold at an average Price/Book ratio of 0.73x and an average Price/NII ratio of 11.46. They had an average analyst rating of = 2.5 a LTM NAV change of -13.16% and Last Three Year NAV change of -26.45%.

Summation - Newton's first law of motion (An object at rest stays at rest and an object in motion stays in motion with the same speed and in the same direction unless acted upon by an external force) appears to be the law in this sector when it comes to NAV movement. The NAV trend is a major influence on Price/NAV valuations.

The evidence that PWAYs influence Valuations:

The following companies had Portfolio company Weighted Average Yields at or under 9% - (weeding out the underperforming OSCI): CGBD, OCSL, GBDC, PFLT and SUNS. Their average yield is 8.37%. Their mean LTM NAV change is -0.18% and their mean 3 year NAV change is -1.89%. Their mean Price/NAV is 93.41%.
The following companies had weighted average yields between 9% and 10%: ARCC, CCT, GARS, HTGC and MRCC. Their average yield is 10.3%. Their mean LTM NAV change is -1.51% and their mean 3 year NAV change is -4.11%. Their mean Price/NAV is 97.44%.
The following companies had weighted average yields between 10% and 11%: AINV, BKCC, CMFN, FSIC, MCC, NMFC, SCM, SLRC, TCAP, TCPC, TCRD, TPVG and TSLX. Their average yield is 10.94%. Their mean LTM NAV change is -3.07% and their mean 3 year NAV change is -10.80%. Their mean Price/NAV is 92.19%.
The following companies had weighted average yields between 11% and 12%: ABDC, GLAD, GSBD, HCAP, PNNT, SAR and WHF. Their average yield is 10.05%. Their mean LTM NAV change is -4.19% and their mean 3 year NAV change is -12.43%. Their mean Price/NAV is 92.38%.
The following companies had weighted average yields over 12%: CPTA, FDUS, GAIN, HRZN, OFS, PSEC and OXSQ. (FDUS and GAIN have positive histories that skew the numbers that follow.) Their average yield is 10.83%. Their mean LTM NAV change is -1.37% and their mean 3 year NAV change is -5.78%. Their mean Price/NAV is 82.24%.

Summation - BDCs tend to sell at yields that roughly match the yield of the stuff that they own. Loans with lower PWAYs are lower risk. Loans with higher PWAYs are higher risk. Over time the higher risk is reflected in falling NAVs.

The Connection Between PIK/TII Ratios and valuation metrics Price/NAV + Price/NII Ratios and weeding out the high CLO owning BDCs HRZN, KCAP, OHAI, SAR and OXSQ.
The following had LTM PIK/TII Ratios under 1%: ACSF, GAIN, PFLT, SLRC and SUNS. Their mean price to NAV [where par = 100] is 98.71%. Their mean P/E is 12.54.
The following had LTM PIK/TII Ratios between 1% and 4%: CGBD, OCSI, GBDC, MAIN, MRCC, PSEC, SCM, TCRD, TSLX and WHF. Their mean price to NAV ratio is 101.99%. Their mean P/E is 10.88.
The following had LTM PIK/TII Ratios between 4% and 6%: CCT, OCSL, GSBD, HTGC, NMFC, TCPC and TPVG. Their mean price to NAV ratio is 100.87%. Their mean P/E is 10.20.
The following had LTM PIK/TII Ratios over 6%: ABDC, AINV, ARCC, BKCC, CMFN, CPTA, FDUS, FSIC, GARS, GLAD, HCAP, MCC, OFS, PNNT and TCAP. Their mean price to NAV ratio is 79.41%. Their mean P/E is 9.54.

The Connection Between PIK/TII Ratios and performance metrics YTD Price Change, NAV Change + NII Projection Change and weeding out some of the high CLO owning BDCs KCAP, OHAI and OXSQ.

The following had LTM PIK/TII Ratios under 1%: ACSF, GAIN, HRZN, PFLT, SLRC and SUNS. Their mean LTM NAV change is -0.45%, mean 2018 NII projection change is -0.47, mean YTD price change is 1.4, mean 2018 YTD target change is 1.00%. Their mean NAV change since Q1-15 is -2.73%, mean Portfolio Dollars Per share change is 2.58, mean TII/share change is 4.45%, mean NII/share change is -0.06%.

The following had LTM PIK/TII Ratios between 1% and 4%: CGBD, OCSI, GBDC, MAIN, MRCC, PSEC, SCM, TCRD, TSLX and WHF. Their mean NAV change is -1.38%, mean NII projection change is 0.89, mean price change is -2.3, mean target change is -1.76. Their mean NAV change since Q1-15 is -4.89%, mean Portfolio Dollars Per share change is -5.78%, mean TII/share change is 4.15%, mean NII/share change is -4.98%.

The following had LTM PIK/TII Ratios between 4% and 6%: CCT, OCSL, GSBD, HTGC, NMFC, TCPC and TPVG. Their mean NAV change is -3.26%, mean NII projection change is -4.74, mean price change is -1.09, mean target change is -3.01. Their mean NAV change since Q1-15 is -10.13%, mean Portfolio Dollars Per share change is -0.89%, mean TII/share change is -3.19%, mean NII/share change is -5.32%.

The following had LTM PIK/TII Ratios over 6%: ABDC, AINV, ARCC, BKCC, CMFN, CPTA, FDUS, FSIC, GARS, GLAD, HCAP, MCC, OFS, PNNT, SAR and TCAP. Their mean NAV change is -5.35%, mean NII projection change is -7.92, mean price change is 0.35, mean target change is -5.49. Their mean NAV change since Q1-15 is -14.05%, mean Portfolio Dollars Per share change is -12.75%, mean TII/share change is -18.79%, mean NII/share change is -23.86%.

Summation - There is not that much separation in the sub six percent PIK income weightings of TII. But get over six percent and valuations are significantly influenced, as are the performance metrics.

The Connection Between NII/TII Ratios and valuation metrics Price/NAV + Price/NII Ratios and weeding out the high CLO owning BDCs KCAP, OHAI, SAR and OXSQ.
The following had LTM NII/TII Ratios over 60%: MAIN and SUNS (due to fee waivers the ratio is temporarily low). Their mean price to NAV [where par = 100] is 130.8%. Their mean P/E is 13.61. Their mean LTM NAV change is 2.86%, mean 2018 NII projection change is 2.27, mean YTD price change is -4.63, mean 2018 YTD target change is 1.24. Their mean NAV change since Q1-15 is 1.82%, mean Portfolio Dollars Per share change is -3.96%, mean TII/share change is 13.59%, mean NII/share change is 10.35%.

The following had LTM NII/TII Ratios between 53% and 60%: ACSF, BKCC, CGBD, GLAD, GSBD, PFLT, TCAP, TCPC and TSLX. (ACSF, BKCC and TCAP had problems with other attributes which sank their performance and valuations.) Their mean price to NAV ratio is 99.03%. Their mean P/E is 11.11. Their mean NAV change is -2.28%, mean NII projection change is -4.01, mean price change is 3.24, mean target change is -0.98. Their mean NAV change since Q1-15 is -8.52%, mean Portfolio Dollars Per share change is -11.79%, mean TII/share change is -5.59%, mean NII/share change is -10.03%.

The following had LTM NII/TII Ratios between 50% and 53%: AINV, CCT, HTGC, MRCC, NMFC and TCRD. Their mean price to NAV ratio is 96.71%. Their mean P/E is 9.26. Their mean NAV change is -2.28%, mean NII projection change is -4.01, mean price change is 3.24, mean target change is -0.98. Their mean NAV change since Q1-15 is -8.52%, mean Portfolio Dollars Per share change is -11.79%, mean TII/share change is -5.59%, mean NII/share change is -10.03%.

The following had LTM NII/TII Ratios between 46% and 50%: ABDC , ARCC , FDUS , OCSI , FSIC , GARS , GBDC , HRZN , OFS , SLRC , TPVG , WHF. Their mean price to NAV ratio is 88.88%. Their mean P/E is 10.13. Their mean NAV change is -2.13%, mean NII projection change is -0.24, mean price change is -0.66, mean target change is -3.53. Their mean NAV change since Q1-15 is -7.25%, mean Portfolio Dollars Per share change is -0.48%, mean TII/share change is -3.25%, mean NII/share change is -8.57%.

The following had LTM NII/TII Ratios under 46%: CMFN, CPTA, OCSL, GAIN, HCAP, MCC, PSEC, PNNT and SCM. Their mean price to NAV ratio is 78.17%. Their mean P/E is 10.16. Their mean NAV change is -8.37%, mean NII projection change is -10.78, mean price change is -9.02, mean target change is -4.12. Their mean NAV change since Q1-15 is -17.71%, mean Portfolio Dollars Per share change is -15.72%, mean TII/share change is -20.46%, mean NII/share change is -28.99%.

Summation - The data strongly indicates one wants to avoid NII/TII ratios under 46%.

We have now reached our final data parsing set.

The Correlation of cost of debt to other metrics - eliminating 2017 under performers CMFN, OHAI & TCAP.

The following companies had a cost of debt under 4% in Q1-18: ACSF, GBDC, OFS and SCM. Their mean 2018 earnings projection change is -3.59%. Their mean Price/NAV ratio is 0.96%. Their mean Price/NII ratio is 11.21. Their mean yield is 9.77% - compared to a PWAY of 9.76%. Their mean LTM NAV change is -2.32%. Their mean three year LTM NAV change is -2.45%.

The following companies had a cost of debt between 4% and 5%: ARCC, BKCC, CCT, CGBD, FDUS, OCSI, FSIC, GARS, GSBD, MRCC, NMFC, PFLT, PNNT, SLRC and TSLX. Their mean 2018 earnings projection change is -0.81%. Their mean Price/NAV ratio is 0.94%. Their mean Price/NII ratio is 10.36. Their mean yield is 9.58% - compared to a PWAY of 10.34%. Their mean LTM NAV change is -1.61%. Their mean three year LTM NAV change is -7.33%.

The following companies had a cost of debt between 5% and 6%: ABDC, CPTA, OCSL, GLAD, HTGC, MAIN, SAR, TCAP, TCPC, TCRD, TPVG and WHF. Their mean 2018 earnings projection change is -6.78%. Their mean Price/NAV ratio is 0.96%. Their mean Price/NII ratio is 10.41. Their mean yield is 10.17% - compared to a PWAY of 11.10%. Their mean LTM NAV change is -4.83%. Their mean three year LTM NAV change is -11.89%.

The following companies had a cost of debt over 6%: AINV, GAIN, HCAP, HRZN, KCAP, MCC, PSEC and OXSQ. Their mean 2018 earnings projection change is -4.34%. Their mean Price/NAV ratio is 0.80%. Their mean Price/NII ratio is 9.98. Their mean yield is 12.19% - compared to a PWAY of 11.76%. Their mean LTM NAV change is -4.5%. Their mean three year LTM NAV change is -15.76%.

Summation - The cost of debt is a factor in the market's setting of a logical Price/NAV ratio. But one can find several other factors that have "outcome spreads" that are higher. A small BDC can have only credit facility and SBA debt - the two least expensive forms of debt.

Now that I am finished with the data presentation, pause for a few seconds and think about this. I have just provided the evidence to make the case that the natural condition of the Price/NAV ratio should not be one to one. The Price/NAV ratio should reflect the relative degree of varying (1) dividend coverage, (2) NAV trends, (3) PWAYs, (4) NII/TII ratios, (5) PIK/TII ratios and (6) Cost of Debt. In doing that, have I also provided an example to the question "What is good due diligence?" This article does not contain everything you need to know. But I have provided a pretty good share of the "must know" information.

I have also provided the metric justification for my three key guidelines for newbie BDC investors (which contain some hyperbole) (First) "Never buy an uncovered dividend". (Second) "Never buy a falling NAV". (Third) "Your portfolio should be dominated by the lower PWAY BDCs".

Disclosure: I am/we are long AINV, ARCC, FDUS, MAIN, 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.