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BDC Daily News For Thursday February 22, 2018

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Five BDCs reported quarterly and year end earnings all at the same time. The BDC Reporter has read all the press releases and some of the 10-Ks involved. As we projected in an earlier post there has been little in way of surprises when results are compared against analyst expectations or the BDC Reporter’s. All five BDCs involved had a Dividend Outlook of UNCHANGED for 2018 before the results came out, and nothing changed with the review of the IVQ 2017 results. By reporting coincidence, these are amongst the “best” BDCs out there. What we  noted most of all is that in several cases – and before we undertake our own systematic deep dive into each portfolio – credit quality appears to have improved at the end of 2017 versus 2016. Of course, some of that has been achieved by booking Realized Losses and moving on. Nonetheless, the number of non-accrual loans is very low by any standard with the Solar Capital BDCs having none of all, GSBD with a minor troubled name remaining but with essentially no value attached and modest non-performers at MAIN and HTGC. In most cases Net Asset Values Per Share have held up well, increasing in 4 out of 5 cases. Also intriguing – and different investors can draw different conclusions from this phenomenon – portfolio yields have mostly held up in 2017 despite rampant “spread compression”.

Finally – and in line with the message we sought to convey when critiquing the recent negative article by the Wall Street Journal’s “Heard On The Street” – the diversity of business strategies amongst these 5 BDCs  is striking. MAIN continues to be a lower middle market lender and investor (with a sideline in upper middle market lending); HTGC dominates in the field of venture investing, whose borrowers its other 4 peers would not even look at; GSBD is focused on the middle to upper middle market and uses a JV structure to goose its returns; SUNS has transformed itself into a financial services conglomerate of a kind while SUNS is a hybrid, but aiming at even safer, lower yielding loan assets. The term BDC as a description of what these public entities actually do is increasingly meaningless and the results harder to compare and contrast with one another. Many Closed End Loan funds and Exchange Traded Funds are almost identical to one another, but the BDC Sector has become the bastion of diversity. That’s more homework for investors, but reduces the risk of everybody performing the same way over the long term.

  • 2/22/2018: Main Street Capital Announces Results

    MAIN: Key metrics such as Distributable Net Investment Income Per Share up hugely over prior year : 26%. For year achieved DNII of $2.56 versus $2.39 the year before. NAV jumped too from $23.53 from $22.10 at year end 2016 and 2.2$ over IIIQ 2017. As reported earlier, the IQ 2018 announced dividend was higher than the prior year and MAIN continues to pay semi-annual Supplemental Dividends. The BDC Reporter adds: Obviously a very good year for a BDC accustomed to annual achievements. Noted, though, that there were no virtually no net Realized Gains in MAIN’s Control portfolio- which typically consists of Lower Middle Market deals where they often serve as lender and major investor. Last year MAIN booked $32mn in Realized Gains in this group. That’s surprising in this hot house M&A environment. We will look at 10-K to see if the BDC booked numerous Realized Losses in year. At year end there were 5 borrowers on non accrual, which represented 2.3% of the portfolio at cost and just 0.2% at FMV. From the BDC Reporter’s perspective, credit is the key issue to look out for. That’s an issue which investors often forget about where MAIN is concerned.
  • 2/22/2018: Hercules Capital Announces Results

    HTGC: Adjusted (for debt repayment costs) Net Investment Income Per Share reaches $0.32 and IQ calendar 2018 dividend announced of $0.31. Net Investment Income Per Share down on year, but NAV and credit quality up. The BDC Reporter adds: Leaving out adjustments for both 2016 and 2017, HTGC’s recurring earnings dropped from $1.34 to $1.16, hurt by spread compression, above average Realized Losses and dilution from new stock offerings. Most notably so-called Core Yields were down to 12.5% in IVQ 2017 versus 12.9% a year before. The small increase in NAV is entirely due to not distributing all income during the year. Still, the high flying BDC has improved credit quality and debt to equity – net of SBIC debt – is at a relatively modest 0.62x (real leverage 0.73x), in line with the prior year. The key question from the BDC Reporter for 2018 and beyond – as HTGC continues to grow its balance sheet (now over $1.5bn) and earnings ($100mn) in absolute terms – is whether the BDC will outgrow its specialty venture lending pond, and with what consequences ? More aggressive underwriting of venture deals ? Entering new “verticals” within the venture investing space ? Entering entirely new industry segments ? Apropos of nothing we can’t help noting that HTGC does offer up the most comprehensive data set in any earnings release we’ve reviewed to date.
  • 2/22/2018: Goldman Sachs BDC Announces Results

    GSBD: IVQ 2017 Net Investment Income was $0.47 per share, as expected by analysts. NAV dropped to $18.09 from $18.23. The dividend remained unchanged at $0.45 for the 12th quarter in a row. The BDC Reporter adds: Difficult year for GSBD from a credit standpoint with Realized Losses of over ($66mn). The impact on earnings was offset by growing balance sheet, which boosted Investment Income. Still, Net Investment Income Per Share for 2017 dropped for second year in a row to $2.07 and $2.10 and $2.14 in the two prior years. On the plus side, non-accruals now only 0.1% of total investments at cost. Stock trades at premium to book and recent increase in Revolver suggests an equity raise in 2018 might be in cards.
  • 2/22/2018: Solar Capital Announces Results

    SLRC: IVQ 2017 Net Investment Income came in above analyst expectations at $0.44 versus $0.42 projected. For year NIIPS was $1.62. NAV was up by 1 cent. The dividend – as previously announced – was increased to $0.41 for the IQ 2018. Results achieved without special fee waivers. BDC Reporter adds: Excellent earnings in the quarter, helped by originations exceeding repayments and portfolio yield unchanged on year despite spread compression. SLRC transforming itself very quickly into a diversified commercial finance company with 200+ borrowers in various portfolios. Outlook for 2018 helped by lower 0.25% management fee announced earlier. More details to follow on review of Conference Call and 10-K.
  • 2/22/2018: Solar Senior Announces Results

    SUNS: Earnings and NAV for IVQ and full year 2017 came in as analysts expected. Quarter’s earnings $0.35 and $1.41 for year. NAV up 3 cents to $16.84. Gross yield up due to new NorthMill acquisition. No loans on non-accrual. BDC Reporter adds: We’ve not yet reviewed the 10-K, but SUNS appears to be on track, maintaining results essentially unchanged from 2016. However, results achieved thanks to increased fee waivers by Investment Advisor. Without the boost earnings would be well below the distribution level – now unchanged for 23 quarters after declaration through March 2018.

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