The week ending April 21 was another quiet one, both in terms of news developments and BDC price changes. As we noted in the BDC Reporter's Common Stocks Market Recap for the period, investors seem to be in a "wait-and-see" mode after the Silicon Valley Bank (SVB) failure, which caused prices to swoon. Likewise - except for an occasional preview or filing - the BDCs themselves don't have much to say, probably busy getting their investment presentations ready for May's earnings season.
Main Street Capital (MAIN) - for reasons that are unclear to us - followed in the footsteps of Capital Southwest (CSWC) and offered up a preview of several key IQ 2023 metrics, which we discussed at great length in the BDC Reporter. Nothing was said explicitly about future dividends - the subject of most interest to BDC Best Ideas - but there was much hinting of future increases. Here is the exact language used in MAIN's press release:
..."based on our strong first-quarter results, we expect another meaningful supplemental dividend to be paid in the second quarter of 2023, which would represent our seventh consecutive quarterly supplemental dividend and would result in another quarter in which we provide significant additional value to our shareholders."
Through the first half of 2023, MAIN has paid or announced $1.5250 in total distributions - both regular and special - which annualizes to $3.0500 per share, already better than 2022's total payout of $2.9450. However, we're projecting MAIN's final dividend count will come to $3.6000, so we're counting on further distribution increases in 2023.
Another nearly 20% increase in the payout may seem aggressive but the recent preview press release did indicate that MAIN's Net Investment Income Per Share in the IQ 2023 would be in the range of $1.01-$1.03. Using the mid-range number and annualizing, we get a NIIPS of $4.08. Our payout projection for 2023 in the Expected Return Table might be 22% higher than 2022's actual result, but could still be too low...
There's a good chance that both the analyst consensus for NIIPS in the IQ 2023 and our own projections for BDC distributions for the year as a whole could be on the low side. Analyst projections tend to be set low, so exceeding expectations may not be a great surprise to investors familiar with these BDCs. In our case, we've all along tried to take into account the impact of higher rates and how they are generating record distributions, but it's difficult to nail down exactly given a host of other factors such as dividend payout policy; tax regulations; the impact of realized gains and losses, etc. Earnings are projected to jump 11.2% but could jump 15%. Dividends - going by our numbers - should be growing by 9.5%, but that might rise by 12.0% or more.
Higher For Longer
If that wasn't enough, what we're hearing from the Fed and the thousands of institutions, analysts, and commentators who hang on their every word and translate for us, is very encouraging for BDC distributions in 2024 as well. At the moment, we project peak BDC earnings will occur in the IVQ 2023, but 2024 might not see much of a downshift, as the Fed may need to keep rates pretty close to peak levels for many quarters yet. As a result, we're ever more comfortable that our projection that total BDC distributions in 2024 will be flat with 2023's record-setting level is reasonable.
Outside of the level of interest rates, the largest"known unknown" is the impact of credit losses - whether in the form of non-performing loans on income or net realized losses. On one hand, the data is showing that defaults, bankruptcies, and the like are running at much higher levels across the leveraged finance space than in 2021 and 2022. Moreover, there's a consensus amongst the rating agencies and other professional doom-sayers that things are going to get worse before they get better. Our own research at the BDC Credit Reporter confirms all of that where the public BDC sector is concerned.
However, the losses that we anticipate showing up in the IQ 2023 results and for the rest of 2023, fall within our expectations when we were making our payout projections. What we still don't see - nor do the rating groups by the way - are the catastrophic losses that would materially erode BDC earnings, capital, and distributions. Into every BDC's life, some rain must fall - after two years of drought - but not the sort of deluge that would materially affect their future prospects. We don't expect the IQ 2023 BDC results to change our view, given what we know. If we're going to be wrong about BDC credit performance, the hard data has yet to show up and may not be with us - if at all - till late in 2023 at the earliest.
The "Great Uncertainty" - to coin a phrase - that has been hanging over the BDC sector since the spring of 2022 shows no sign of dissipating either in the short or medium term. We may not get a break in the miasmic cloud till 2024. As a result, it's unlikely that BDC investors - despite their predilection for looking ahead - will be jumping back in with both feet into buying BDC stocks for some time. For BDC investors with money to spend, this extends the already long period in which most stocks are trading at huge discounts to their prospective values and at high yields.