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BDC Wrap-Up: Monday September 25, 2017

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We’ve not completed our promised BDC News Of The Day article about the unexpected challenge by a disgruntled shareholder of MVC Capital (MVC).  Premium subscribers will be seeing the report later today, “if the creeks don’t rise“.


A remarkably quiet news day where Business Development Companies are concerned, after a relatively busy time last week. The only item we added to our Daily News List (we’ve started recording every new development in a spreadsheet, along with a link and a brief summary of what is “market moving” – if anything – about what’s come out). The only item of (modest) consequence was that Ladenburg Thalmann – the investment bank which also provides stock research on the sector – initiated KCAP Financial (KCAP) at Neutral. No price target given. [We’re more bullish in our Special Situations strategy – and are Long KCAP’s common stock – on the premise that the new corporate structure and the two recent Baby Bond financings might result in higher earnings, and less pressure on asset coverage ratios – going forward. As we wrote on Friday, we were pleasantly surprised the BDC did not reduce its distribution when announcing the third quarter pay-out. Still, this is a stock – and a business model – still very much in the air which might explain Ladenburg’s non committal rating]. 


The 46 public BDC stocks we watch have been mostly doing much of nothing, with a few notable and noted exceptions. On Monday, the only significant mover was Medallion Financial (MFIN), down (3.2%). Volume was twice the average, but this has been the pattern for over a month, presumably as investors again lose faith that the BDC – with its disastrous all-in bet on taxi medallion lending – will be able to recover. The stock peaked on May 30, 2017 at $2.93, but the second quarter results and a (slightly) greater transparency by management have done nothing to stay the price erosion. Now, the all-time low of $1.69 – a milestone ignominiously reached this year – is not so far off. [We have a very small Long position  in MFIN, which we entered into a few weeks ago on the premise that insider buys by a Director and the recruitment of a second Director with turnaround experience with failing banks – as well as the more active role being taken by the BDC’s CEO in telling its story – suggests that MFIN might survive in its current form, and create an opportunity for a significant stock price rise in the months ahead. For what it’s worth, we’ve also been consoled by the increase in price of Medallion’s only Baby Bond (MFINL), which is now trading very close to par after falling out of bed last year. Stubbornly or wisely, depending on the ultimate outcome, we remain Long, but are dismayed by every new downward move].


We’ve been using the week-end and this less-than-busy period to continue our Work-In-Progress on several features for our Free and Premium subscribers.  We intend to offer with every new post for all subscribers a comprehensive Disclosure List, which shows which BDC common stocks and fixed income securities we hold in any of the various portfolios we manage. So if you ever wondered what we own, you’ll be able to just click on the list, which we’ll add at the top of every article.

Premium subscribers who read our Weekly Recap will have seen our New And Improved “BDC Baby Bond List”, which we’ve renamed “BDC Fixed Income List”. This is not just an aggregation of all the BDC Notes, Convertibles and Term Preferreds outstanding (along with key details like their coupons, yields, maturity dates and so forth), but also includes BDC Reporter’s own semi-valuable assessments of the likelihood of each issue’s chances of being redeemed early. We say “semi-valuable” because experience has shown our prediction track record is something less than 100%. Nonetheless, we’ve also added links to our latest articles on every issue – where available and keep a useful list of what we’ve changed or added since the last published version to save readers from having to re-read the whole table. Not to boast, but we’re not sure where else readers can get a constantly updated compendium of all 36 public BDC fixed income issues, and all the accompanying commentary.

Coming shortly for subscribers who are interested in what we are investing in – and what not – in our three different strategies (Special Situations, Long Term Income and Fixed Income) will be a list of our Watch List for each strategy. Like a good tailor we believe in “measuring twice and cut once”. Or in other words, we prefer to pull the trigger on our Buys and Sells only after much research and when the Price Is Right. Although we’re investing over $10,000,000 for our own account, this often means doing very little actual buying and selling at times. However, we have been sharing with our Premium readers in almost every article what our investment approach is about whatever BDC we’re writing about. In the future readers will be able to click on our BDC Investor lists and see who are our prospects, and who is getting close to moving into the Buy column and what we’ve actually bought. As we always say, what is right for us may not be appropriate for you, but many readers have expressed interest so we’ll be providing a  more comprehensive picture.

Another feature which we believe will be very popular with readers because it’s central to why most investors choose BDCs is our Dividend Outlook Table. As some of you know, the BDC Reporter assesses each BDC in turn and seeks to project whether its current regular distribution is sustainable or not for the 12 months ahead. We have three categories for every BDC’s outlook: Unchanged, At Risk, Decrease. Those terms sum up the probability of a dividend reduction, based on our research. This started out as an internal list we kept for ourselves, but we offered up – as a one-off- the list to any readers interested a few months ago. Ever since we’ve received repeated requests for an updated copy of the list (which we change in real-time when our opinion changes). We’ve decided to make the Dividend Outlook list available to all our Premium subscribers. However, that’s requiring us to add some other columns of data (including the dividend histories of each BDCs, and how long they’ve maintained the current pay-out) and brief commentary by each name. We’re two-thirds finished. Again, our projections are meant to be useful to engage discussion rather than being regarded as fool proof. Anybody who’s invested in BDCs will know how hard evaluating what a fund’s performance will be like one quarter out, let alone a year. Nonetheless, we are giving it the old college try because being right can be so valuable -especially when Mr Market is guessing the other way- and being wrong can be very painful. Any of the shareholders of the many BDCs who reduced their dividend – or hinted that they might – in the last year and saw their stock price drop like a stone. Here are a few tickers of BDCs in that category: FSIC, CPTA, ABDC,HRZN, or PSEC. Or imagine if you’d projected the cuts to come back in 2011 at FSC when its price peaked at $13.79 ($5.34 today). Or, at OHAI when the price was at $17.37 ($1.20 today). Or, at MCC when the price $15.83 4 years ago ($5.83 today). Spoiler Alert: for what it’s worth the BDC Reporter counts 21 BDCs in the At Risk or Decrease categories. That’s nearly half of all public BDCs in the Dividend Danger Zone…

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