BDC Review Redux Part X: Stragglers And A Few Final Thoughts

by: Philip Mause

The last couple of years have been an active time for BDC offerings and these new offerings have included a fair number of IPOs. This has made it a little challenging for me to keep up with developments and be sure I am including a complete list of BDCs. One of my goals in this series (see part IX) is to produce such a complete list. Thus, I am adding a tenth Part to the series to include three BDCs I have just discovered, at least one of which completed an IPO during the time frame in which the series has run.

New BDCs raise money in an IPO and then either screen proposals to invest that money or immediately invest the money in a pre-existing asset portfolio. The former strategy runs the danger of operating with a large net cash asset base until new transactions are found, reviewed and closed. The latter strategy depends upon the acquisition of the existing assets at a truly fair price. In either case, it is a little difficult to get a handle on the value of the assets, the quality of the management team and the overall trajectory of the BDC until you see at least a couple of quarterly financial reports. The newbies have not yet established enough of a track record for me to make any recommendations. If we run the series again a year from now, we will have much more useful information. After the name of each company, I am providing the stock symbol, Thursday's closing price, and the most recently announced quarterly dividend.

1. TCP Capital (NASDAQ:TCPC) (15.25) (.35) - TCPC is a relatively large company for a newbie - it has gross assets of some $521 million. It appears to be a conversion of a predecessor entity so some financial history is available. It earned 43 cents in the most recent quarter and it announced a 35 cent dividend and a 5 cent special dividend; its NAV is $14.79. Its asset base appears to include loans to relatively large companies. It appears to be poised to join the "solid citizen" group of BDCs oriented to relatively safe loans and with a sufficient size to avoid the diseconomies of being too small.

2. Monroe Capital (NASDAQ:MRCC) (15.02) (---) - MRCC just started trading on October 25. Its IPO came out at $15 so investors have done well considering what the market has been doing in this time frame. It has purchased a portfolio of loans from affiliated entities and, as far as I can tell, has not announced a dividend. It raised $75 million in the IPO so it seems to be planning to start operations at a relatively small but not necessarily too small size level.

3. OFS Capital (NASDAQ:OFS) (14.35) (.34) - OFS has literally just gone public and I have been unable to get much helpful information. It holds, apparently through a subsidiary, a portfolio of some $200 million worth of loans. Its pro forma post-IPO NAV is $15.00. OFS intends to invest in senior loans to middle market companies and has announced a policy to pay a 34 cent quarterly dividend. We will really have to wait until we see at least one or two quarterly financial reports to evaluate this company.

The BDC sector is alive and well - perhaps even "thriving." New IPOs are coming out; existing BDCs are completing secondary offerings of both equity and debt at a healthy pace. It is probably one of the intended consequences of Federal Reserve policy that low interest rates have made investors more and more aggressive seeking reasonable yield and that has led to a robust market for BDC equity and debt, which in turn makes funds available to middle- and small-sized businesses.

The sector has become quite diverse. From specialty BDCs like Medallion (TAXI) and Harris & Harris (TINY) to large diversified financial companies like American Capital (NASDAQ:ACAS) to pre-IPO investors lie Firsthand Technology (NASDAQ:SVVC) to specialty debt investors like Oxford (NASDAQ:OXLC) to long-term buy and hold investors like Central Southwest (NASDAQ:CSWC) - the industry is incredibly diverse and it is very hard to generalize. Still, we have the "mainstream" or "paradigmatic" model of the BDC that lends money for 3 to 5 years to middle- or small-sized companies and borrows money at lower rates to make money on the spread. This is still the model that most BDCs follow and the era of super low interest rates but nervous bankers has worked out well for most companies following that model. In most cases, the stocks are nicely up year over year and, when added to a generous dividend, the stock appreciation has produced a very decent return for income oriented investors.

It is very hard to tell what is ahead. The explosive of public offerings might make one nervous but the BDC "industry" is still tiny in comparison with the market it serves. Higher interest rates would definitely hurt in the short term but many BDCs lend on a LIBOR-plus basis and the loans they make are relatively short term so that money can be redeployed at higher rates. Sharply higher interest rates would definitely drive down stock prices in the short term but would not likely drive any of the companies out of business and in the long term investors might actually see dividend increases as money is deployed at higher interest rates.

I owe readers answers on various questions and I hope to cover them in future articles. I still think that a diversified portfolio of these companies is a solid component of any yield-oriented portfolio.

Disclosure: I am long ACAS, TINY, SVVC. 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.