BDC Market Update
As predicted in many previous articles, business development companies ("BDCs") have been outperforming the S&P 500 in 2019 with the average BDC up around 16.2% after taking into account dividends as compared to the S&P 500 up around 11.5% (also including dividends). Most of the BDCs that were considered to be the most ‘underpriced’ have rallied 20% or more in 2019, including FDUS, TPVG, OTC:AINV, MRCC, GLAD, and CGBD.
BDCs such as MAIN, NMFC, TCPC, TSLX, GBDC, PFLT, ARCC, GSBD, PNNT, and SUNS had better price performance near the end of 2018 and were not as oversold going into 2019 which is likely why they have not appreciated as much as the others.
It should also be noted that the best way to invest in BDCs is to select a few that fit your risk profile rather than using the UBS ETRACS Business Development Company ETN (BDCS) which is an exchange-traded note that continues to underperform the average BDC for a few reasons but mostly related to index allocations and "tracking fees."
One of the many things that I like about BDCs is the pricing volatility during general market swings including the most recent in December 2018 providing plenty of opportunities for investors. BDC pricing is closely correlated to yield spreads including other non-investment grade debt and ‘BofA Merrill Lynch US Corporate B Index’ (Corp B). I typically make multiple purchases when Corp B effective yields rise including January/February 2016, when the markets experienced concerns of slowing Chinese growth and increased energy sector defaults driving higher yield expectations, especially for non-investment grade debt.
Also shown in the previous chart, Corp B yields are now closer to the historical average of 6.5% which is/was driving higher BDC pricing this year.
Previous Article Follow-Up
As discussed in "Time To Buy 11.3% Yielding TCG BDC With Upcoming Special Dividend Announcement And Share Repurchases" from earlier this week, CGBD's stock price has been under technical pressure due to the continued and final release of pre-IPO shares but has started to rally with meaningful trading volumes:
Individual BDC Performance Updates
Most BDCs reported calendar Q1 2019 results earlier this month resulting in a wide range of changes in stock prices.
The BDCs with the most exposure to collateralized loan obligations ("CLOs") are OXSQ, PSEC, and PTMN that are among the worst performers in 2019 likely due to concerns of a potential recession. It is important to understand that BDCs typically invest in the riskiest portion of the CLO ladder which is the equity portion that would take the first hits to loss of income and capital:
MCC has been underperforming for many reasons and is what I consider to be a trainwreck of a BDC run by likely the worst managers resulting in almost a 50% decline in net asset value ("NAV") per share over the last 3 years. Management has discontinued its dividend and seeking a merger with the most recent news:
Proxy advisory firms Institutional Shareholder Services and Glass Lewis recommend that Medley Capital stockholders vote to remove two incumbent directors, Seth Taube and Arthur Ainsberg, NexPoint Advisors says.
Source: Yahoo Finance
PFLT and PNNT were founded by Art Penn who also co-founded OTC:AINV in 2004. PFLT has been consistently marking down certain assets and during the quarter ended March 31, 2019, added four investments to non-accrual status. As shown below, the stock took a hit after reporting results earlier this month with its relative strength index ("RSI") dipping below 30:
Source: Yahoo Finance
PNNT's stock chart looks similar as its NAV per share declined by $0.22 or 2.4% mostly due to unrealized depreciation from four investments Superior Digital Displays Holdings, Affinion Group Holdings, Hollander Sleep Products and AKW Holdings.
GSBD was co-invested with PFLT on Country Fresh Holdings which was placed on non-accrual status due to financial underperformance contributing to its 2.3% decline in NAV per share along with the restructuring of ASC Acquisition Holdings. GSBD's stock price has recently dipped along with its RSI:
Source: Yahoo Finance
What I am doing and upcoming MRCC article:
I am currently going over the results of each BDC assessing dividend coverage potential and portfolio credit quality for each BDC to establish appropriate price targets based on relative risk and returns.
I will have an article discussing MRCC's recent performance including reporting below its base-case projections due to higher incentive fees paid during the quarter partially offset higher-than-expected portfolio growth. The company also reported below analysts projections:
My primary concern is MRCC's relatively low dividend coverage with materially increased leverage and will discuss in the upcoming article.
Source: SEC Filings and bdcbuzz.com
The information in this article was previously made available to subscribers of Sustainable Dividends, along with:
- Real-time changes to my personal BDC positions
- Target prices and buying points
- Real-time announcement of changes to dividend coverage and worst-case scenarios
- Updated rankings and risk profile
- One-month preview of upcoming public articles
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.
Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.