TCG BDC: Not Quite Yet

Sep. 28, 2020 6:57 PM ETCarlyle Secured Lending Inc. (CGBD)18 Comments

Summary

  • Current Macroeconomics do not favor BDCs.
  • The Carlyle Group BDC is a decent firm.
  • However, it takes on more risk than some and there are better options out there.
  • Looking for more investing ideas like this one? Get them exclusively at Cash Flow Kingdom. Get started today »

Macro

The high yield spread, as shown by the St. Louis Fed graph below, has improved significantly since it blew out in March's COVID-19 crash. Thus, the spread is nowhere near the 8%+ peaks (vertical green lines) which have previously marked particularly attractive Business Development Company 'BDC' buying points.

Source: St. Louis Fed and Google Finance

Recently, however, the BDC sector has gotten cheaper with price declines carrying the Wells Fargo BDC ETN (BDCS) to an almost oversold position (36 RSI).

Source: Yahoo Finance

The main fear prompting the most recent dip is essentially the same as March's. Namely that a double dip COVID-19 induced recession could cause numerous debt defaults among the middle market companies that BDC's lend to.

This in fact might happen this winter, and frankly knowing whether it will is a key risk to all BDCs. Management teams may rate how many of their loans are currently in trouble, but there's little ability for the analyst to second guess this judgment, nor do the risk ratings say as much about future loan viability as we'd like them to. For this reason, combined with the leveraged nature of BDCs, Cash Flow Kingdom decided to lower its risk rating on just about every BDC name it covered when COVID-19 first hit. We also placed the overall sector on hold, and have been pretty much sitting on the sidelines ever since.

We don't deny everything will eventually be just fine, in fact we are generally some of the more optimistic people we know regarding the US getting past COVID-19. Further, we acknowledge if we can pick the right firm and time it decently, specific BDCs will end up being quite a bargain. The phrase, "Be Greedy when Others or Fearful" still applies. However, we contend first you need to be pretty sure any firm under consideration

By combining a number of well covered and different revenue streams, the Cash Flow Kingdom Income portfolio has been able to produce this actual, real life payout.

Source: Etrade

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This article was written by

Darren McCammon profile picture
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Author of Cash Flow Club
The Investment Community where "Cash Flow is King"

Darren's started his career as the Assistant Manager of a 7-Eleven; eight years later he was responsible for 14 stores. This imparted a business sense he still finds quite useful today.

After getting his MBA, Darren then moved into doing strategic financial planning and analysis for Silicon Valley firms, eventually achieving Director's status. These strategy, modeling and analysis skills, as well as a lot of hours in boardrooms talking with executives, transferred well into stock investment. It allowed him to first retire in 2006 at the age of 40.

With Cash Flow Club, Darren is now seeking to help others by sharing the analysis and real-world strategies that allowed him to retire early. He remains a full-time investor whose primary source of income is dividend and interest from his investments. He eats what he kills.


Education:

- Bachelors in Economics

- Masters in Business Administration

- Certificate in Personal Financial Planning

Disclosure: I am/we are long CGBD. 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.

Additional disclosure: This analysis was provided at the request of Seeking Alpha; however I wrote it myself, and it expresses my opinion only. CGBD is a risky investment. We do not know your goals, risk tolerance, or particular situation; therefore, we cannot recommend any specific investment to you. Please do your own additional due diligence.

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