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BDC Investment Tools: Improvements To Prepare For Earnings Season

BDCs:
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BACKGROUND

The BDC Reporter provides a number of exclusive Investment Tools to subscribers. 

For those of our readers who may not be familiar with one or more of them, we’d like to discuss the information contained therein; the volition behind the data gathering and the benefit investors derive from using these tools.

We’d also like to discuss a major enhancement underway in the BDC Earnings Table, aimed at greatly improving readers preparation for the quarterly earnings releases. 


Fixed Income Table

The grandaddy of our Investment Tools is the BDC Fixed Income Table, a complete list of all the publicly traded BDC unsecured debt issues and all the associated data you’d need to invest in this under-covered corner of the market.

We currently list 43 different issues from 27 different BDC issuers and update pricing and yields weekly and keep up to date on when bonds pass their non-redemption periods and reach their maturity dates.

As far we know, this is a unique resource found only on the BDC Reporter and is available to all our Premium subscribers.

We were one of the first publications to devote attention to the BDC Fixed Income when a number of issuers began coming to market with publicly traded instruments in 2012.

The data in the Fixed Income Table dovetails with our frequent articles about the BDC Fixed Income sector and the weekly BDC Fixed Income Market Recap, another unique periodic discussion of market conditions.

Many readers have told us how the Fixed Income Table is their first stop when going shopping for BDC debt investments and a useful resource about ex-dividend dates, coupons, redemption deadlines, etc. thereafter.


Dividend Outlook

Then there’s the Dividend Outlook Table, an ambitious project to rate the sustainability of every BDC’s dividend over the coming 12 months period.

The goal: to help investors – especially those who see BDC common stock investing as akin to investing in bonds – ascertain which pay-outs are the most likely to be sustained.

For every BDC stock, we offer a rating of INCREASE, UNCHANGED, AT RISK or DECREASE, based on our overall analysis.

We make no claim of infallibility and the AT RISK category serves as a useful catchment category when the outlook is muddy.

Nonetheless, we’ve been right over the years much more than we’ve been wrong and provided readers with a considered viewpoint to use when making their own decisions as to where to invest.

Update

By the way, as we write this, the BDC distribution outlook is pretty rosy through the summer of 2020:

13 BDCs are projected to increase their distributions; 22 are expected to remain the same; 9 could stay unchanged or be cut and only 1 seems likely to pay out less going forward than in the prior 12 months.

Of course, how a BDC performs in terms of dividend paying and as an investment are not the same thing.

Even as the distribution remains unchanged or increases the stock price can be dropping; obviating all the benefits.

However, over the long term most all BDC returns come from distributions rather than capital appreciation so keeping one’s eye on dividend levels is important.

Anyway, besides our distribution projection, we also provide a myriad other useful details in the Table.

This includes the year the BDC in question went public; the amount of the dividend, the latest yield and the length of time the existing payout has remained unchanged : the “Dividend Streak”.

This requires constant updating, but makes the Dividend Outlook Table a useful practical resource for those of our readers who want the information they need all in one easy-to-use place.

Starting at the end of this month – kicking off the second half of the year – we’re going to begin writing a monthly recap of dividend activity and any changes to our outlook.


SBCAA Adoption Table

More recently, when the Congress passed a new law – the Small Business Credit Availability Act (“SBCAA”) – reducing minimum asset coverage requirements for BDCs, we launched the SBCAA Adoption Table.

As we surmised from the outset, virtually every BDC has signed up over the past 15 months to be governed by the lower asset coverage/higher leverage allowed by the SBCAA.

Leaving out the most recent public BDC – Owl Rock Capital – 40 BDCs have adopted the new levels, 3 have not committed themselves and only 2 have said no thank-you.

The BDC Reporter believes the passage of the SBCAA – for better or worse – is the most important development to affect the BDC sector since the launch of its unique format in 1980, also by act of Congress.

The new law will  – and has – caused a huge increase in assets under management and all financed by debt, and all during the extra innings of this economic expansion when competition for loans is at its apex.

Moreover, to add complexity to the situation, the target leverage that each BDC sets for itself varies – sometimes widely.

Some BDCs are willing to leverage themselves almost up to the new regulatory limit, while others are being more circumspect and barely exceeding historical levels.

As a result, the impact on the balance sheet and earnings of every BDC that has adopted the SBCAA will vary, and much more so than was the case under the old rules.

However, the process of adding AUM by dint of more borrowing will take several years to play out and we are barely past the first anniversary.

Will this seminal change in the rules eventually result in higher Return on Equity for BDC shareholders or bigger than ever loss of book value and of earnings or something in between ?

The jury is out, but in the interim the BDC Reporter’s SBCAA Adoption Table provides a wealth of information about every BDC out there’s asset and leverage status and how far they’ve moved towards their ultimate leverage goals.

We’ve probably been remiss in not advertising the SBCAA Adoption Table more – once again a unique offering – because the progress BDCs make towards their goals will be critical in determining risk and return for years to come.

At the end of the IQ 2019,  the BDC sector had moved one-third of the way towards its target level since March 2018, so the SBCAA Adoption Table will be changing with every quarter and be a resource for years to come.

We’ve been also writing periodic updates on how select BDCs are progressing down the SBCAA path and will continue to do so.

Much as we’d like to, we cannot write a quarterly update for every BDC but we are striving to keep the data in the Table itself as up to date as possible.

We recently updated every BDC through its most recent balance sheet publication and are gearing up for the second quarter deluge of new numbers.

The BDC Reporter intends to write a sector update every quarter to cover over time the monumental changes in aggregate assets and liabilities going on before our very eyes.


BDC Earnings Table: Upgrade

At first, our ambitions for the BDC Earnings Table were modest.

We wanted to create a calendar database, updated quarterly, giving the date of each BDC’s coming earnings release and the date and time of the subsequent Conference Call.

Admittedly readers can find this information in numerous other places, including each BDC’s website and financial mega-sites like Seeking Alpha, which provides similar info and a brief preview.

We recently decided to “up our game” and enlarge the BDC Earnings Table to provide readers a wide range of information in advance of each BDC’s earnings release.

We’ve added a series of fields that include such information at the historic and projected full year earnings per share and  the analyst consensus of earnings for the upcoming quarter.

The latter allows readers – when the results come out – to judge how actual earnings performance diverges from the projected, and whether the long term EPS trend is up or down.

We also indicate whether NAV Per Share was Up, Down or Unchanged in the prior quarter and offer up the BDC Reporter’s projection for the upcoming period.

(Changes in NAV from quarter to quarter are notoriously volatile, so we don’t suggest making any big bets on our surmising).

To provide as full a picture, we also include both the current dividend payout trend (shamelessly borrowed from the Dividend Outlook Table) and the projection for the future payout.

We also duplicate key facts from the SBCAA Adoption Table, including what the current level of assets at each BDC are and the projected amount of additional assets, if and when the “target leverage” is met.

(Some BDCs have announced what their target debt to equity leverage will be,  for others we make our best estimate).

We also provide the number of portfolio companies in each BDC’s portfolio, as well as the number which are under-performing, as evaluated by the BDC Reporter and the rough value thereof.

To provide more perspective, we also publish the BDC’s own dollar value of under-performing assets to allow readers to compare and contrast.

(BDCs don’t offer up the number of companies on their internal ratings list, so we can’t compare that statistic).

We also offer up our own Credit Outlook – based on an exhaustive and exhausting review of each company in each BDC’s portfolio.

As always we have a rating system for the Credit Outlook: GOOD, OKAY and POOR.

(Of course, there is much we do not know and these ratings just represent our best guess based on incomplete and sometimes confusing publicly available credit information about BDC borrowers).

Finally, we end with 3 long form reports at the end of each file.

The first highlights the main items that the BDC Reporter believes readers should be looking out for when a BDC’s small mountain of results are released.

Based on our knowledge of each credit; our review of the latest Conference Call, earnings press release and filings – and any intra-quarter developments we’re aware of – we offer up to 5 issues to consider.

This is followed by our longer term perspective on each BDC; summing up its principal strengths and weaknesses and seeking to place the coming quarter’s release in a broader context.

Finally – given that most readers are interested in how this all boils down to investing, we discuss where each BDC’s stock price stands; and whatever changes have occurred in the short and long term and why.

We call this a Market Snapshot and helps readers to determine – as best one can in this format – to evaluate where a BDC stands in the risk-return spectrum.

Much to the dismay of some we don’t give Buy, Sell, Hold recommendations based on our long held belief that each reader’s perspective on these issues is different from ours and one another’s.

At the end of the day, our role is to analyze, inform and illuminate.

Deciding when and where to pull the proverbial trigger is up to you.

However, we’re hoping this enhanced and enlarged BDC Earnings Calendar will provide readers with plenty of food useful preparatory material in advance of every BDC’s quarterly release.

As you’d imagine, this is a time consuming project, but we hope to have every BDC updated by the time IIQ earnings season rolls round.

To date, we have completed the files for Alcentra Capital (ABDC), Apollo Investment (AINV)  Ares Capital (ARCC), and Horizon Technology (HRZN).

As usual any feed-back or suggestions from readers about the format or the content is welcomed.

Just drop a line to nmarshi.bdcreporter@gmail.com.

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