BDC Review Redux Part VI: BDC Wrap Up ... Not

by: Philip Mause

When I started the sixth article in the series last year, I thought I would be wrapping things up. However, I learned of the existence of some new BDCs I had not been aware of and also of some other investment vehicles for participating in the sector and so the sixth article was not really the "wrap up" I had assumed it would be. As I have indicated, action in the sector is dynamic with a number of secondary equity offerings as well as a number of bond offerings. This is part of the "hunger for yield" phenomenon and will likely continue as long as rates stay low which will likely be for a very long time indeed.

This group of stocks is a bit unusual because it includes some stocks which have exited the sector and, as I indicated in earlier articles, BDCs are relatively stable (at least with respect to bankruptcy risk) because of the restrictions on leverage. After the name of each stock, I will provide the symbol, the price on September 7, 2011 when the original article was run, Thursday's closing price, and the current yield.

1. THC Credit (NASDAQ:TCRD) (11.37) (14.21) (9.01%) - TCRD focuses on subordinated debt and uses limited leverage. It is part of the THL Credit family of companies which specialize in high yield debt. TCRD has assets of some $342 million and debt of only $70 million. Low leverage is probably appropriate in light of the fact that less than 25% of the assets consist of first lien debt and over 50% are made up of subordinated debt. The average yield on its debt holdings is 14% and supports the high dividend yield. TCRD sold some 5.3 million shares in September at $14.09 for $74.7 million and will doubtlessly deploy more money over the next couple of quarters. Most recent Net Asset Value (NYSE:NAV) was $14.09 a share as of the end of the last quarter.

2. New Mountain Financial (NYSE:NMFC) (12.58) (14.63) (9.3%) - NMFC has had considerable recent insider buying. It uses considerable leverage but has a more conservative asset mix than TCRD. It assets include 58% first lien and 38% second lien loans. NMFC has an unusual corporate structure in that it owns membership units in New Mountain Finance Holdings which apparently is the company which actually holds and manages the assets. NMFC is not the only owner of such membership units and apparently does not even own a majority. I am not completely sure why this structure was adopted but an investor should be sure he or she is comfortable with the structure.

3. Tortoise Capital (TTO) (8.14) (8.98) (4.9%) - TTO has recently elected to terminate its status as a BDC and is in the process of becoming a Real Estate Investment Company. It invests primarily in energy infrastructure (pipelines, gathering systems, etc.) and is an attractive option for an investor interested in that sector. Because it is no longer a BDC, I will probably not cover it in any updates to this series in the future but I may include it in an article on the energy sector in the near future.

4. Equus Total Return (NYSE:EQS) (2.23) (2.44) (0) - We are now entering the world of the micro BDCs. EQS is quite small with only about 10.5 million shares. It made a pretty big bet on a solar company, Infinia, which unfortunately did not pay off and resulted in a roughly $8 million loss which for this size BDC is a very big deal. On the other hand, the stock recently had a pop due to the profitable sale of its interest in the Orco Property Group. EQS has an eclectic assortment of investments and as some are equity holdings it is difficult to be confident of NAV, which was $3.17 as of the last quarter and before the Orco transaction. It is one of my few losing positions in the BDC space and is a lesson to investors - DO NOT RELY ON NAV UNLESS YOU FULLY UNDERSTAND THE ASSET MIX!

5. MACC Private Equity (formerly MACC.PK) (.95) - Another one bites the dust. This company announced on September 16, 2011 that it had decided to liquidate its assets and has been succeeded by the MACC PEI Liquidating Trust. I do not have any information on the results of that liquidation but the net assets appeared to be worth quite a bit more than last year's share price.

6. Waterside Capital (was WSCC.PK, is now OTCPK:WSCC) (.15) (.18) (0) - Another nano-BDC in trouble. They recently announced that they were in default on an SBA loan. A likely candidate for liquidation.

A few words of caution. The micro BDCs are very risky, generally do not pay dividends and are not recommended. TTO is an interesting way to participate in the energy infrastructure boom without getting in the Master Limited Partnership tax morass (although some people tell me it is not all that bad). TCRD has definitely staked out a high yield debt strategy but as long as it keeps its leverage low, it can be a reasonable part of a yield oriented portfolio. NMFC seems to be doing fine and may be a very good choice for investors who are comfortable with the somewhat unusual structure.

The "traditional" BDCs with a focus on investing in debt instruments have done quite well in the past year with some nice appreciation adding to a generous dividend yield. Even in the recent slump, most of these stocks have held up pretty well. I am sad to say goodbye to TTO but the sector has become pretty dynamic with comings and goings on the increase.

Disclosure: I am long TTO, EQS. 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.