Investigating & investing in BDC's

[DTEJD1997]

Hey all:

 

I'm trying to investigate BDC companies. I suspect there is a real possibility that there are some real bargains in this sector. "Investors" are getting panicked over a possible interest rate increase and the problems with oil & gas. Oh yeah, almost forgot all the "general" market volatility.

 

So I think this may have created an opportunity.  Leon Cooperman has also been investing in this sector.

 

Of course, you've got to be very careful.  A lot of these companies are run for the benefit of management, NOT shareholders.  They pay out tons in dividends as a lure to get unsophisticated investors in.  Sometimes dividends are partially funded by raising of equity (ponzi?).

 

HOWEVER, this is not always the case. 

 

Good management should raise equity when the stock is trading above book value (1.10x maybe), and buy it back around .80/BV.  Wash, rinse, repeat till rich...

 

I also think there is a great possibility to "triple dip".  A). You are at a time of distress, getting well over 10% dividend yields,  B). You are buying at a significant discount to book value, if you buy at .80, perhaps in a few years that will narrow to .95 of book.  Finally, if you've got management, they can slowly grow the business over time,  in 4 year $10 of book value can grow to $12 in book value.

 

So you get value from the dividend+ narrowing of B/V discount + growth of business.

 

So far, the only company I've found is PNNT.  I suspect there are other good ones.

 

Any thoughts/input?

[plusalpha]

check CODI.

DIv about 9%, good management. But fairly valued now.something you can keep an eye on.

http://www.compasstrust.com/

 

[no_free_lunch]

ARCC seems to be the gold standard for BDC's and might be worth investigating.  Since inception in 04 it up about 240% versus roughly 120% for the S&P.  The performance might even be a bit higher if you standardize the discount to NAV from start to finish.  Right now it yields about 10% which is not as cheap as PNNT but still a healthy yield for a stock that has historically trounced the S&P. 

 

My only issue with BDC's is that they might not be the best thing to own if we go into a recession.  With PNNT I am willing to take the risk because it is already priced for a recession.  However, given the nature of the loans I have a hard time putting more than a small amount of capital into these things.

[no_free_lunch]

In general, this site has a LOT of info on BDC's.  Probably a good starting point.

 

http://www.bdcbuzz.com/allbdcs.html

[Guest MarkS]

I own some shares in Full Circle Capital (FULL).  They still have cash from their most recent dilutive stock issue. Bulldog filed a 13d - increasing its position a couple of times. And according to whalewisdom, several other opportunistic funds have poured into the stock. In fact the rate of new positions to closed positions is about two to one. This is also true for funds adding to their positions.

[DTEJD1997]

I own some shares in Full Circle Capital (FULL).  They still have cash from their most recent dilutive stock issue. Bulldog filed a 13d - increasing its position a couple of times. And according to whalewisdom, several other opportunistic funds have poured into the stock. In fact the rate of new positions to closed positions is about two to one. This is also true for funds adding to their positions.

I looked into Full Circle (FULL) as one to investigate. 

 

I indeed found some interesting things...My conclusion is that management is feeble minded.

 

They diluted shareholders to loan money to "General Cannabis" a bit over a year ago.  Looking at CANN's financial results is eye-popping indeed!  Where did all the kash go?  Did they smoke it up?  Yahoo is reporting them as having 16,500 in kash!  It is down WELL over 95%, but yet it still sells for 1,100X book value.  It is selling for 30X sales....

 

If the "brain trust" at FULL thought loaning money to "General Cannabis" was a good idea, what other "investments" have they bankrolled?

 

This alone strikes them off the list of potential investments.

[Guest MarkS]

DTEJD1997 - You're absolutely right, Management has made a number of bone headed moves.  Nevertheless, you have several opportunistic funds moving in to shake things up. The shares are trading  over a 30% discount to book.  They have cash and tax loss carryforwards. Management is already being forced to shape up. They're cutting fees, and looking to buy back shares. So I'm content with seeing how this plays out. My bet is relatively short term and rides the coattails of Bulldog et al.

Thanks

Mark

[Guest MarkS]

I'm also trying to learn more about BDCs. This site has some interesing posts.  http://bdcreporter.com

Thanks

Mark

[BargainValueHunter]

http://www.marketwatch.com/story/fitch-bdc-debt-wall-poses-potential-challenges-for-2016-2015-10-16

 

Rated BDCs with 2016 maturities include Apollo Investment Corporation ($229 million), Ares Capital Corporation ($805 million), Fifth Street Finance Corp. ($115 million), and BlackRock Capital Investment Corporation ($158 million). All have sufficient borrowing capacity on corporate credit facilities to allow for the refinancing of maturing debt at spreads over LIBOR ranging from 175 bps to 225 bps and maturities ranging from 2018 to 2020.

 

However, corporate credit facilities require a security interest in unencumbered assets, while convertible notes are unsecured, which reduces funding flexibility, in Fitch's opinion.