BDC Weekly Review: Yield Myopia Ignores The Right Metrics

seekingalpha08-17

We take a look at the action in business development companies through the second week of August and highlight some of the key themes we are watching.BDCs underperformed with a total return of -2% due...

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}\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nBDC Weekly Review: Yield Myopia Ignores The Right Metrics\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-08-17 11:34 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4715308-bdc-weekly-review-yield-myopia-ignores-the-right-metrics><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>We take a look at the action in business development companies through the second week of August and highlight some of the key themes we are watching.BDCs underperformed with a total return of -2% due...</p>\n\n<a href=\"https://seekingalpha.com/article/4715308-bdc-weekly-review-yield-myopia-ignores-the-right-metrics\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"BCSF","symbol_name":"Bain Capital Specialty Finance","start_time":0,"source_url":"https://seekingalpha.com/article/4715308-bdc-weekly-review-yield-myopia-ignores-the-right-metrics","article_id":"2460920897","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1350471747/image_1350471747.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2460920897","pubTimestamp":1723865667,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"In our view, these questions are not the right questions to ask because the questions themselves make certain assumptions. The assumption behind the dividend is that the dividend more-or-less represents the longer-term growth rate of the capital allocated to the stock. This assumption does not hold for TPVG. Its total NAV return over the last 3 years is 0.6% per annum, about 10% below the average BDC per annum. The dividend is not a relevant metric for people considering whether or not to hold this stock because it is totally divorced from TPVG’s ability to deliver a return anywhere close it. The chart below plots 3Y total NAV returns  and dividend yields. The highlighted area contains BDCs that have not delivered a return close to their dividend yields.   Systematic Income BDC Tool We can illustrate this as a yield gap in the chart below, being the difference between the dividend yield and total NAV return.   Systematic Income BDC Tool On the second question, the metric that is useful","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"BCSF":"Bain Capital Specialty Finance","BK4135":"资产管理与托管银行","CGBD":"Carlyle Secured Lending","OBDE":"Blue Owl Capital Corp III","BBDC":"Barings BDC Inc","BK4148":"电子元件","TPVG":"Triplepoint Venture Growth BDC Corp","BDC":"百通公司"},"translate_title":"BDC每周评论：收益率近视忽略了正确的指标","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"BCSF":1,"US7Y.BOND":1,"US6M.BOND":1,"US5Y.BOND":1,"US3Y.BOND":1,"US30Y.BOND":1,"US2Y.BOND":1,"US12M.BOND":1,"US10Y.BOND":1,"TPVG":1,"OBDE":1,"CGBD":1,"BDC":1,"BBDC":1,"US912797GK78.BOND":0.6,"US912797GL51.BOND":0.6,"US912797GW17.BOND":0.6,"US912797HE00.BOND":0.6},"content_text":"We take a look at the action in business development companies through the second week of August and highlight some of the key themes we are watching.BDCs underperformed with a total return of -2% due to poor quarterly results or dividend cuts.TriplePoint Venture Growth highlights the disconnect between dividend yield and total NAV return.Carlyle Secured Lending delivered a decent quarter, with non-accruals below median levels and preferred conversion at NAV.   DNY59/iStock via Getty Images Welcome to another installment of our BDC Market Weekly Review, where we discuss market activity in the Business Development Company (\"BDC\") sector from both the bottom-up - highlighting individual news and events - as well as the top-down - providing an overview of the broader market. We also try to add some historical context as well as relevant themes that look to be driving the market or that investors ought to be mindful of. This update covers the period through the second week of August. Market Action BDCs underperformed on the week with a total return of around -2%. The reason for underperformance was largely due to poor quarterly results or a dividend cut.   Systematic Income Unlike many other income securities, BDCs have not recovered a whole lot after the initial swoon and the average BDC is down around 8% over the past month.   Systematic Income The sector valuation is now back to around its longer-term average, making it more attractive.   Systematic Income Market Themes TriplePoint Venture Growth (TPVG) cut the dividend by 25%, reflecting a drop in net investment income over the past year. This drove the stock down 10% over a couple of days to an 18% discount. There are two common questions when this happens. One, is the dividend safer now and two, at the new lower valuation is it a buy? In our view, these questions are not the right questions to ask because the questions themselves make certain assumptions. The assumption behind the dividend is that the dividend more-or-less represents the longer-term growth rate of the capital allocated to the stock. This assumption does not hold for TPVG. Its total NAV return over the last 3 years is 0.6% per annum, about 10% below the average BDC per annum. The dividend is not a relevant metric for people considering whether or not to hold this stock because it is totally divorced from TPVG’s ability to deliver a return anywhere close it. The chart below plots 3Y total NAV returns (y-axis) and dividend yields. The highlighted area contains BDCs that have not delivered a return close to their dividend yields.   Systematic Income BDC Tool We can illustrate this as a yield gap in the chart below, being the difference between the dividend yield and total NAV return.   Systematic Income BDC Tool On the second question, the metric that is useful in gauging whether the valuation is now attractive, is the valuation-adjusted total NAV return, which we use in our service BDC Tool. On average, this is around 10.1% in the sector. For TPVG it is 0.8%. On this basis, no high double-digit valuation will make it attractive.   Systematic Income Could the stock turn around and deliver good results? Maybe. The last two quarters it underperformed the sector only by a little bit. But the thing about BDCs is that obvious and consistent underwriting problems do not disappear overnight. BDCs are not hedge funds that can quickly turn around their performance. In idiosyncratic scenarios (i.e. those that are not systemic like Q1-2020) NAVs don't really fully reverse their falls and often one quarter that exposes bad underwriting is followed by several other bad quarters. We rated TPVG as a Sell almost exactly a year ago after it started to become clear something was awry with its underwriting, and it has continued to struggle since then with the stock falling by over 30%.   Systematic Income BDC Tool An underwriting culture is hard to change, and its results become embedded in portfolios for a long while. TPVG actually highlights an interesting dynamic in the sector, which is that underperformers are often actually still too expensive. This was true of BKCC and FCRD and is true of MRCC, HRZN and TPVG. Market Commentary There was interesting color from GBDC on the Pluralsight transaction. What seems to have happened was that the sponsor Vista was in negotiations with lenders about a longer-term solution, but time ran out, and they had to make a decision about what to do about an immediate interest payment. To make the payment and buy more time, they arranged a loan from Vista to the company to make the loan. GBDC did not spell this out, but it seems that the IP was then moved to a subsidiary and used to collateralize the loan from Vista. If this is correct then the size of the problem is relatively small (likely one interest payment) and it ultimately went to benefit the lenders (i.e. the collateral was used to pay the lenders, without which presumably the payment would not have been made). According to GBDC, this was not a case of lender-on-lender violence or a liability management exercise. On the call, GBDC spoke highly of Vista. That said, at the end of the day, Vista stopped supporting Pluralsight and the lenders need to find a solution of what to do with the company - keep running it or try to sell it. It’s still very likely going to be a loss for everyone involved. Carlyle Secured Lending (CGBD) delivered a decent quarter. The NAV fell 0.7% as net investment income declined by around 5% partly from the drop in leverage. Total NAV return for the quarter was 2.1% - below the median so far in the sector. Non-accruals increased by 1.6% and are below the median level. Overall, the company has been performing a touch below the median level over the past year, and its current valuation is right at the median level. It’s not as expensive as it was just a few weeks ago but it’s also not a bargain. One piece of good news has to do with its preferred conversion which would normally be hugely dilutive to the NAV given when it was done but it will be instead exchanged at the NAV - a very good result. It is no longer the albatross around its neck. Stance And Takeaways  This week we took advantage of price weakness and topped up our positions in the Blue Owl Capital Corp III (OBDE), the Barings BDC (BBDC) and Bain Capital Specialty Finance (BCSF), partly by rotating from OBDC. All three BDCs remain attractively valued, and OBDE should now benefit from the merger catalyst with OBDC.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2460920897"}