On The Docket

As we indicated in our Wednesday April 7, 2021 Market Agenda, the BDC Reporter has been traveling internationally and could not prepare and publish a report for Thursday April 8 in a timely manner. As  result, and to maintain the continuity of our wall-to-wall coverage, this Friday April 9 edition will consist of two days reportage. While we were incommunicado, the BDC sector has reached a new high and then stepped back, as we discuss below. Furthermore, there have been two quarterly updates on investment activity and more besides.

• BDCZ And The S&P BDC Index At New 52 Week Highs: We’ve copied this headline from our prior article two days ago. Since we last wrote, on April 7 BDCZ reached a new intra-day high of $19.43. That’s just 1 cent higher than the prior record the day before. BDCZ – which is the UBS Exchange Traded Note which owns the bulk of BDC public common stocks – closed the day at $19.38, up from $19.23 the day before but on measly volume. On Thursday April 8, BDCZ fell back slightly. Our other BDCD sector measuring stick – the S&P BDC index-  also reached a new high on April 7 and yet another on April 8: 288.21. On a YTD basis, the S&P index is up 23.5% and over 1 year (92.0% !). Seeking Alpha data shows 42 of the 43 BDCs we track are up in price in 2021, except for Great Elm Capital (GECC) which is off (9%).All this data offered to underscore that the BDC sector remains at or very close to its highest heights.

• Horizon Technology Finance (HRZN) Provides IQ 2021 Portfolio Update:    Like some of its peers (see GBDC below), HRZN likes to preview for investors before the formal earnings broad changes in its portfolio that have occurred in the most recent full quarter. The latest version shows 8 new loans with a value of $51mn being booked. By the way, that’s almost exactly the same dollar volume of new activity as a year ago at the same time, but less than the $77mn of the very busy IVQ 2020.   The number of portfolio companies – thanks to three departures – reduced from 69 to 68, even if the press release seems to suggest total portfolio assets increased.

In the IVQ 2020, HRZN confessed to a number of troubled investments and saw its stock price drop (13%) from $14.96. The BDC Reporter – after reading all the details – was not too put off by the bad quarter, as we mentioned in our IVQ 2020 review:

“Maybe we’re being contrarian, but the BDC Reporter is not so disturbed by the IVQ 2020 results. The BDC has reduced its under-performing debt assets to just 4% of the total portfolio at FMV. That’s the lowest percentage we’ve identified so far across the public BDC sector. Furthermore, current new investment activity is high and is supported by substantial liquidity and leverage that is materially below the BDC’s 1.2x debt to equity target. Onboarding loan yields remain high at 12%+ and the cost of borrowing for HRZN is coming down, like for most other BDCs. (We expect it’s Baby Bond with the ticker HTFA to be repaid soon). With liquidity GOOD, its dividend UNCHANGED and credit status GOOD, the IVQ 2020 may prove an aberration rather than a sign of deeper troubles”.

The market seems to have come to the same conclusion. After three days of doubt and selling off, HRZN’s stock price has shot up again and closed at $15.68, a multi year high, after dropping as low as $12.62. That’s another telltale of a buoyant BDC market. The latest portfolio update – limited in terms of news about credit quality – does not move the needle on this subject. We heard from the press release that an unidentified company on non accrual repaid its obligations in full. We imagine that’s IgnitionOne, which was already listed as non accruing in the IVQ 2020 and was valued at cost. On an earlier conference call, HRZN’s management explained the situation at the company and why the investment is fully valued:

“Just to refresh your memory, IgnitionOne was a company that had some difficulties, but they ended up selling parts of the company to another private company. And in that process, we were — the secured creditors were paid down, and we are the only remaining secured creditor against the estate of IgnitionOne, which holds a substantial amount of private stock in the acquiring company of IgnitionOne which secures our loan. The value of that stock is multiples of our debt. Unfortunately, it’s also illiquid. And so we’re waiting for an opportunity to either transact that stock in a secondary sale or for that company to effect a transaction that would make that stock more liquid.So we do believe that our balance is secure. So we’ve rated that credit, although it’s on nonaccrual because we’re not getting paid anything, we continue to rate that as a 2-rated credit@.

• Prospect Capital (PSEC)  Tenders for $60mn Of Two Debt Issues:  Continuing a now regular pattern, PSEC announced by press release on April 7, 2021 it’s attempt to repurchase some of the remaining outstandings under its 5.875% Senior Notes due 2023 and 6.375% Notes due 2024. In each case, PSEC seeks to repurchase $30mn out of $366mn in debt outstanding in those two issues. A premium is being offered. As we’ve reported before, PSEC has sought to repurchase its unsecured debt before with little success. We cannot tell if this newest offer of a premium of $41.50 and $75 respectively for every $1,000 invested will be enough to convince investors. Management seems to function on the principle of “nothing ventured, nothing gained” so we’ll have to wait and see. The expiration date is May 5, if the offer is not withdrawn earlier so we’ll report back on May 6 – or thereabouts – as to the results.  Given that the BDC has over $2.0bn in debt, and only $60mn is in play here, even complete success will barely move the interest expense needle for PSEC, but you have to admire the tenaciousness of the BDC’s external manager in seeking to lower its interest expense burden. 

• Golub Capital (GBDC) Announces IQ 2021 Investment Deployments:  As happens every quarter, GBDC reported some summary numbers about its IQ 2021 investment activity. Here’s the full content of its press release:

“Golub Capital BDC, Inc. (“GBDC”) (Nasdaq: GBDC, www.golubcapitalbdc.com), a business development company, today announced that it originated $234.7 million in new middle-market investment commitments during the three months ended March 31, 2021. Approximately 75% of the new middle-market investment commitments were one stop loans, 24% were senior secured loans and 1% were equity securities. Of the new middle-market investment commitments, $175.0 million funded at close. Total investments at fair value are estimated to have decreased by approximately 2.5%, or $114.6 million, during the three months ended March 31, 2021 after factoring in debt repayments, sales of securities, net fundings on revolvers and net change in unrealized gains (losses)”.

On a $4.5bn total portfolio, $175mn in new fundings is modest. On a pro-forma basis, GBDC’s total portfolio seems to have dropped from $4.507bn to $4.391bn, also a modest change.  The analyst consensus for the calendar IQ 2021 Net Investment Income Per Share (NIIPS) is $0.29, same as the actual result for the prior quarter and the quarterly dividend. This latest announcement suggests that NIIPS is likely to be in the $0.27-$0.29 range when we hear from GBDC. Currently GBDC trades at $15.28, which results in a yield of 7.6% and a PE multiple (using $0.29/$1.16) of 13.2x. The 52 week high is $15.43. Before the pandemic, and its subsequent Rights Offering, GBDC’s annual dividend was $1.28 and closed at a high of $18.09 shortly before the impact of the pandemic was felt, which equated to a price to dividend of 14.1x.  If that multiple were to replicated this time round, GBDC could reach a pro-forma price of $16.356, or a further 7% increase from its current level.

• Main Street (MAIN) Amends Revolver: On April 8, 2021 MAIN announced some amendments to its Credit Facility. The key elements are as follows:

“The recently closed amendment provides an extension of the final maturity to April 2026.  The total commitments of the Credit Facility increased from $780.0 million to $855.0 million while maintaining an expanded accordion feature that allows for an increase up to $1.2 billion of total commitments from new and existing lenders on the same terms and conditions as the existing commitments.  The interest rate for outstanding borrowings under the Credit Facility remains unchanged at the applicable LIBOR rate plus 1.875% so long as Main Street satisfies certain agreed upon excess collateral and leverage requirements, consistent with the historical requirements under the Credit Facility.  In addition to the extended maturity and increased commitments, Main Street continues to maintain two, one-year extension options under the amended Credit Facility which could extend the final maturity of the Credit Facility for up to two additional years, subject to certain conditions, including lender approval”. 

Note the very good borrowing rate MAIN has been able to achieve with its group of 19 lenders. That’s partly because the now $855mn facility – only drawn to $269mn at year end 2020 – is the only secured debt facility on a portfolio with a value of $2.7bn. (Admittedly, a portion of those assets are held in SBIC subsidiaries, financed by $304mn in long term unsecured debentures). Otherwise, MAIN’s $635mn of other on-balance sheet financing is in the form of two unsecured notes due in 2022 and 2024. That LIBOR + 1.875% borrowing rate on the Revolver (all-in just over 2% per annum) is one of the lowest rates we’ve seen in the BDC space, especially for an entity largely focused on lending and investing in illiquid smaller private companies. The BDC’s popularity with its lenders continues with this latest extension, although we’d be surprised if MAIN were to materially increase its outstandings towards the maximum allowable. At a time, though, when some larger BDCs are borrowing in the unsecured market at rates equivalent with their secured borrowings, MAIN is not there yet.

Credit Review

We’ve made significant headway in our review of Ares Capital’s (ARCC) massive 350 company portfolio, nearly a tenth of the BDC universe. We hope to complete our work and write a credit review by the week-end. Currently, we’ve identified 34 underperforming companies, rated 3-5 on our 5 point scale. However, just 25 have material value, and of those 13 are rated CCR 4 or CCR 5. We will focus principally on those companies when finalising our review. Otherwise, our only significant observations at this point is that we were reminded of the relatively large numbers of investments whose income is being received principally in non-cash form. More positively, ARCC also boasts a significant number of equity stakes in portfolio companies whose ultimate sale could reasonably offset routine credit losses in the quarters ahead. With the markets very “hot”, the chances of seeing ARCC – and many other BDCs with equity or warrants in companies – harvesting gains is especially high.