TCG BDC: 13% Discount, 10.5% Yield (NASDAQ:CGBD)

Summary

TCG BDC yields 10.52%, including quarterly special dividends.
It's selling at an -12.80% discount to its 3/31/21 NAV/share.
CGBD reported Q1 '21 earnings this week - updated earnings, valuations and profitability comps vs. the BDC industry are covered in this article.
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TCG BDC (NASDAQ:CGBD), is a New York-based company which provides debt investments in the U.S. middle market companies. It also invests in first lien and second lien senior secured loans, middle market junior loans, such as corporate mezzanine loans, equity co-investments, syndicated first lien and second lien senior secured loans, high-yield bonds, and structured finance obligations.

CGBD is managed by the Carlyle Group, a major asset management firm, with an $15B market cap, and $260 billion of assets under management, as of 3/31/21.

Business Development Companies, known as BDCs, offer the retail investor exposure to privately-held firms, which often are funded by venture capital firms. However, since they invest in privately-held companies, it's up to BDC's management to keep investors informed on the economic health of their portfolio companies.

We've covered several BDCs in our recent articles - this is one of the pockets of the market which was beaten down in the COVID Crash, with sub-book value prices, and higher yields. Investors got very wary in 2020 about how well those portfolio companies would fare in the pandemic lockdown economy.

However, as you can see, the BDC industry overall has risen from the ashes, and is up 70.65% over the past year, and sitting just -4.6% below its 52-week high, as of the 5/4/21 close.

As usual with any industry, some stocks have done better than others price wise. CGBD has outperformed BDC industry averages, the VanEck Vectors BDC Income ETF, and the S&P 500 over the past month, quarter, year and so far in 2021:

We began covering CGBD in mid-December. Since then it has had a total return of 32%, VS. 12.89% for the S&P 500:

Holdings:

CGBD's portfolio consisted of 66% First Lien Debt, of which 3% is last out; with 16% in 2nd Lien debt, 2% in equity investments, and 15% in its two investment funds:

(CGBD site)

The top seven industries comprise 46% of the portfolio, with tech as the leading allocation, as usual - most BDCs favor the tech industry in their holdings.

(CGBD site)

GCBD has two credit funds - its main funds' top three industry groups comprise 30% of that portfolio, with its top 10 investments accounting for 32%. Banking/finance/insurance/real estate represents 12%, healthcare is 10%, and business services is 8%. Management flip flopped its finance/banking and healthcare allocations in Q1, moving more into finance/banking.

The Credit Fund 2 has a 14% weighting in tech, followed by finance/banking, at 135, software, at 11%, and business services at 8%. Its holdings are more concentrated than the other credit fund, with 78% in its top 25 investments, vs. 68% for the other credit fund:

(CGBD site)

Portfolio Risk Ratings:

Most BDCs have an internal rating system for the companies that they invest in or lend to. CGBD's management uses a 1 - 6 rating system, with 1 being the top and 6 being the bottom, although their presentations only show ratings from 1-5.

As of 3/31/21 non-accruals were at 3.3% of total investments at fair value, up slightly from 3.2% at 12/31/20; and 5.4% at amortized cost, vs. 5.5% at 12/31/20.

Rating 4: "Borrower is operating materially below expectations and the loan's risk has increased materially since origination. In addition to the borrower being generally out of compliance with debt covenants, loan payments may be past due, but generally not by more than 120 days. It is anticipated that we may not recoup our initial cost basis and may realize a loss of our initial cost basis upon exit."

Rating 5: "Borrower is operating substantially below expectations and the loan's risk has increased substantially since origination. Most or all of the debt covenants are out of compliance and payments are substantially delinquent. It's anticipated that we will not recoup our initial cost basis and may realize a substantial loss of our initial cost basis upon exit." (CGBD site)

The portfolio was stable in Q1 '21 - the overall fair value moved up slightly in Q1 '21, to $1.526B, vs. $1.508B as of 12/31/20, with the top 3 tiers comprising 94.5%, ~flat vs. Q4 '20's 94.6% weighting.

(CGBD site)

Q1 2021 Originations:

Fundings can be lumpy on a quarterly basis - Q1 '21 had $151.4M, down 41% vs. Q4 '20, and 11% vs. $290M in Q4 '19. Sales and repayments were also much lighter in Q1, at $149M, vs. $400M in Q4 '20.

(CGBD site)

Earnings:

2020 was understandably a negative earnings growth year for CGBD due to the pandemic shutdowns. Q1 '21 also showed year-over-year negative growth in total and net investment income, but NAV/share rose 10.72%, to $15.70, due to a turnaround in unrealized and realized gains:

On a trailing basis, those gains added $1.40/share, and buybacks added $0.11/share to NAV/share, which rose to $15.70, vs. $14.18 a year ago:

(CGBD site)

Sequentially, total investment income fell ~$2.66M in Q1 '21 vs. Q4 '20, primarily due to lower interest income from a lower average loan balance as well as lower OID accretion and prepayment fees due to lower loan prepayments in the quarter.

Expenses, though, also fell, by $1.44M, closing part of the gap for NII in Q1 '21 vs. Q4 '20. NII of $20.68M was lower vs. the previous four quarters, when NII ranged from $21.23M to $23.97M:

(CGBD site)

Dividends:

Management declared the regular $.32 dividend, plus a $.04 supplemental dividend, which goes ex-dividend on 6/29/21. At its 5/4/21 closing price of $13.69, CGBD yielded 10.52%:

Distribution coverage bottomed out in Q3 '20 at .97X, and improved to 1.06X in Q4 '20, and hit 1X in Q1 '21, averaging 1.01X over the past four quarters:

Profitability and Leverage:

ROA and ROE were stable over the past two quarters, and remain better than BDC industry averages. while the EBIT margin fell slightly, and debt/NAV leverage declined to 1.04X in Q1 '21.

Both CGBD's assets/debt ratio and its interest coverage ratio improved in Q1 '21, aided by a lower debt level and lower interest expenses:

Debt and Liquidity:

As of March 31, 2021, CGBD had cash and cash equivalents of $35,493, notes payable and senior unsecured notes (before debt issuance costs) of $449,200 and $190,000, respectively, and secured borrowings outstanding of $309,397. There were $378,603 of remaining unfunded commitments and $358,091 available for additional borrowings under the revolving credit facilities, subject to leverage and borrowing base restrictions.

CGBD's first debt maturity comes in August 2022, when its $150M Credit Fund Warehouse 2 facility matures. Following that, it has no other maturities until late 2024, when 2 Senior Notes come due:

(CGBD site)

Valuations:

At $13.69, CGBD was selling at an -12.80% discount to its 3/31/21 NAV/share of $15.70. On a price/book, price/NII, and price/sales basis, CGBD continues to valued cheaper by the market than BDC industry averages.

The BDC industry appears to be consolidating a bit, with some BDCs opting to grow via mergers and acquisitions, in order to achieve economies of scale, in an increasingly competitive market. It may be that, although its parent Carlyle Group is a very large firm, CGBD's relatively small size is a deterrent to higher valuations.

At $13.69, it's just about even with analysts' $13.65 average price target:

Rating:

We remain neutral on CGBD. It's selling at a discount to NAV, but we'd like to see NII start growing again before adding a position.

All tables furnished by DoubleDividendStocks.com, unless otherwise noted.

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This article was written by

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Robert Hauver, MBA, aka “Double Dividend Stocks” was VP of Finance for an industry-leading corporation for 18 years and has been investing for more than 30 years. He focuses on undercovered and undervalued income vehicles and he leads the investing group Hidden Dividend Stocks Plus.

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