BDC Market Snapshot: Week Ended October 14, 2022
Better But Still Awful
The second week of October was okay for BDC stock prices, which performed better than the major indices, and saw three quarters of the universe we track up in price, as discussed on the BDC Reporter. Nonetheless, the sector remains far, far below its April 2022 price high, and not so far off its 52 week lows. Here's the 2022 YTD stock chart for BDCZ - the UBS sponsored exchange traded note which owns most BDC stocks and serves as a price guide:
Good For Buyers
No wonder, then, that the Expected Return Table remains full of opportunities for long term BDC investors. We count 29 BDCs that could generate annual total returns over 5 years of 20% or more, and 10 offering 15-20% - virtually everybody who is anybody in the public BDC world.
During the week, we've slightly increased the 2022 distribution expectation for WhiteHorse Finance (WHF), which declared a special dividend of $0.05 for the IVQ 2022 before even letting us know what the period's regular distribution will look like. (We're assuming yet another payout of $0.3550, unchanged in 40 quarters already.
Where Gladstone Investment (GAIN) was concerned, the dividend news was good as well. The regular distribution was increased to $0.0800 per share monthly, up from $0.07500 for the IVQ 2022. There was also a $0.1200 special dividend promised for the period. This seems to close out the BDC's payouts for 2022 at $1.27500. We had first projected $1.3800, but did not receive a quarterly special in one period. We've adjusted the model accordingly, and projected $1.2750 for 2027 to keep a 5 year rolling projection.
We admit that the analysts are projecting recurring income going forward of only $0.9300 for FY 2024, well below the total payout we're projecting. However, just a few months ago GAIN had nearly $30mn in undistributed ordinary and capital gains income, which should make up most of the difference. Moreover, with "adjusted Net Investment Income Per Share" already running at an annualized pace of $1.00 a share, we believe recurring earnings will be higher than what analysts are projecting. Still, we'll adjust GAIN's dividend outlook if need be after the IIIQ 2022 results are published.
In any case, GAIN is not high on our shopping list with a total return of "only" 93%, or 18.6% per annum. Like most BDCs, GAIN is trading well below its highest heights of $17.15, closing Friday at $12.23. That's also (20%) below its price level set before the pandemic even though the monthly distribution is now 18% higher. Nonetheless, GAIN has not dropped as much as the sector as a whole, which partly explains why its prospective 5 year return is not even higher.
Top Of Our List
In terms of what to buy, we're intrigued by Crescent Capital BDC (CCAP) following the beating the stock has taken - down (11%) - since announcing its intention to acquire underperforming First Eagle Alternative Credit (FCRD). Investors seem to be punishing CCAP for paying a full price for FCRD - full net asset value and a cash payment to boot of $1.17 per share. However, the cash payment is coming out of the pocket of the buyer's external manager, not the shareholders. What's more, FCRD shareholders are being paid in stock and at a price adjusted for the then net book value, likely to be even lower than$5.30 per share as of June 30, 2022.
Not So Bad
By our count only 4 of the 71 companies in FCRD's portfolio are in any significant trouble. These are - in no particular order - Allied Wireline Services (energy); Matilda Jane (retail); Loadmaster Derrick (energy-again); OEM Group (capital equipment). Their aggregate FMV is only $27mn - much written down already and most not reporting income. As part of a combined post-merger portfolio projected to be $1.6bn, those troubled assets will be insignificant. Most of the rest of the portfolio was acquired during First Eagle's tenure and consists of relatively straightforward, typically first lien, loans. We're not concerned that CCAP is buying itself a boatload of credit troubles, but we wouldn't have minded if the parent had provided a Barings-like credit support arrangement.
Anyway, we've not changed our projections for CCAP because of the pending combination. From 2023, the dividend is expected to reach $1.8000 and remain there through 2026. Given that the analyst consensus is for the BDC to earn $1.89 in 2023, and that in the IIQ 2022 the BDC's Net Investment Income Per Share was annualizing at $2.00 per share, we're not being aggressive in our expectations.
Room To Go
That's not much above the relatively newly public BDC's highest ever price of $21.46, set in October last year. However, with CCAP having dropped to $13.21 as of Friday's close, there's a potential 77% price increase in the offing. (By the way, we see that two analysts had target prices - using much shorter time frames than our own - of $18.00 & $19.00 for CCAP).
We'll be adding CCAP this week to our model portfolio.