2 BDCs With Unjustified Discount Of 10% Or Greater

seekingalpha09-04

In the current environment, it is indeed difficult for BDCs to achieve premium over NAV.However, as the earnings and dividends continue to remain strong in the sector, I see no reason for significant ...

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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\">\n2 BDCs With Unjustified Discount Of 10% Or Greater\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-09-04 08:25 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4718783-2-bdcs-with-unjustified-discount-of-10-percent-or-greater><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>In the current environment, it is indeed difficult for BDCs to achieve premium over NAV.However, as the earnings and dividends continue to remain strong in the sector, I see no reason for significant ...</p>\n\n<a href=\"https://seekingalpha.com/article/4718783-2-bdcs-with-unjustified-discount-of-10-percent-or-greater\">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":"CCAP","symbol_name":"Crescent Capital BDC Inc","start_time":0,"source_url":"https://seekingalpha.com/article/4718783-2-bdcs-with-unjustified-discount-of-10-percent-or-greater","article_id":"2464398455","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1718516015/image_1718516015.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2464398455","pubTimestamp":1725409552,"columns":[],"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"In the current environment, it is indeed difficult for BDCs to achieve premium over NAV.However, as the earnings and dividends continue to remain strong in the sector, I see no reason for significant ","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"CCAP":"Crescent Capital BDC Inc","BK4135":"资产管理与托管银行","BK4122":"互联网与直销零售","BK4094":"服装零售","CION":"CION INVT CORP","PIK":"Kidpik Corp."},"translate_title":"2个不合理折扣10%或以上的BDC","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"CCAP":1,"CION":1,"PIK":0.6},"content_text":"In the current environment, it is indeed difficult for BDCs to achieve premium over NAV.However, as the earnings and dividends continue to remain strong in the sector, I see no reason for significant discounts to NAV.In this article, I have identified two BDCs, which trade at a steep discount to their net asset values despite robust fundamentals. It clearly provides an opportunity for investors.   da-kuk Currently, there is an increased chatter around the sustainability of the BDC earnings as we move into a lower interest rate environment. The idea is that higher interest rates allow BDCs to pocket larger income streams through their typical floating rate investments that are tied to SOFR dynamics. The lower the SOFR component, the lower the total yield BDC can capture from their portfolio. Now, as many of my follower have probably heard (read) this from me several times - the aspect around lower interest rates being a huge negative is not that black and white. There are several counterarguments. For example, BDC debt side usually moves in sync with SOFR, which decreases the cost base. Lower interest rates are also supportive of stronger portfolio investment quality, since the underlying companies become less pressured from aggressive financing rates. Moreover, more accommodative interest rate environment will most probably drive the M&A activity up, which should enable BDCs to revert back to positive net investment activity (i.e., growing their portfolios). On top of the interest rate risk, we are seeing rising non-accruals and higher amounts of negative unrealized losses across the BDC space. A major reason behind these dynamics is once again related to the interest rate aspect, where higher financing costs create an immense pressure on company cash flow profiles and lead to a subdued transaction market, which renders a direct impact on the valuations as well as BDC ability to monetize their equity stakes. All in all, I would say that the current environment for BDCs is not that favorable. Hence, we should not be surprised of not seeing huge presence of premium valuations in this space. However, there are several BDCs out there that are trading at a discount, which is unjustified in relation to their underlying fundamentals. Here are two examples, which, in my opinion, provide a clear opportunity for investors to enter and benefit not only from decent dividend income but also from potential multiple convergence. Pick #1 - CION Investment Corporation (NYSE:CION) CION is a BDC, which focuses on companies that produce annual EBITDA between $20 to $75 million and operate in sectors, which are inherently defensive and stable. Since the strategy is based on such small-cap companies, CION's size is not that massive either with a current NAV of $861 million, which is almost exactly in line with the sector median NAV figure. Currently, CION trades at a discount of 24% to its NAV, which is very massive and one of the steepest in the sector. In my opinion, having so huge discount here is unjustified in the context of the underlying fundamentals. If we look at how CION's portfolio is structures, we will notice that the lion's share of the exposure lies in the first-lien segment, which is the highest / safest level in the capital stack in which BDCs provide financing. As of Q2, 2024 CION had almost 85% of its portfolio placed in these securities, which is not the highest level that could be found in the BDC space, but certainly a level that would not require a huge discount (if any at all). Moreover, the portfolio is nicely diversified across 107 investment companies of which 99% are located in the risk rating 3 bucket that indicates performance, which is perfectly in line with the expectations or projections that were assumed when the investment underwriting process took place. As a testament to this, we can take the fact that currently the total non-accrual base stands at 1.36% from the portfolio FV, which is once again below the sector average and indicative of solid quality. Part of the reason behind solid quality levels is the strict underwriting policy applied by CION - e.g., the weighted average net debt to EBITDA stands at 4.6x and the weighted average interest coverage at 2.01x for CION's investment companies. Having said that, the key driver for the current discount is clearly the exposure to non-cash like income, which consumes a fairly large chunk of CION's NII generation. Namely, it is the PIK component (consuming 16% of the total income) that stimulates the presence of a discount to NAV. Yet, the thing here is that over 60% of PIK investments are in companies that have currently risk ratings either 1 or 2 and 98% that carry a risk rating 3 or higher. In other words, it is not the usual case, where PIK occurs as a consequence of bad asset quality. Instead, the focus on PIK is a deliberate strategy for CION, which has still allowed the BDC to keep the non-accruals low and asset base in high quality. The comment by Gregg Bresner - President & Chief Investment Officer - in the Q2'24 earnings call describes how CION goes about PIK strategy: We continue to strategically focus on first lien investing at the top of the capital structure and prefer to utilize secured yield enhancement provisions such as PIK features, call protection, make whole provisions and MOIC to incrementally enhance yields at the top of the capital structure rather than reaching deeper into capital structures for mezzanine and equity co-investments. Given the above, I just do not see a justified basis for having so steep discount in place. Pick #2 - Crescent Capital (NASDAQ:CCAP) CCAP is a similar BDC to CION as it carries a market of circa $650 million and is also focused on providing loan financing to small and medium-sized enterprises, which are not at VC stage but instead already cash flowing businesses. The discount here is not that as deep as it is for CION, but still relatively notable, i.e., 10% below the NAV. In my opinion, the fundamentals once again are strong enough to fully neutralize the discount or at least reduce it to less material level. Portfolio-wise, CCAP holds on average 0.5% of its total exposure in a single investment and even though CCAP's market cap is not that huge, the concentration in Top 10 largest holdings accounts only for ~ 15% of the total portfolio value. About 89% of the investments are deployed in first lien instruments that already here sends a message of a focus towards higher quality securities. As opposed to CION, the PIK component in CCAP's case comprises a very tiny share of the asset base - i.e., less than 4% of the total investment income. This is even lower than the usual or typical exposure in the BDC space. Speaking of the earnings, the recent net investment income figure reported in Q2, 2024 was sufficient to cover the dividend and leave surplus capital on the books for CCAP to either de-risk the balance sheet or use this liquidity to fund new investments without huge reliance on external debt. For example, given the base dividend of $0.42 per share, the dividend coverage for Q2, 2024 landed at 140%, which is one of the highest coverage metrics in the entire BDC sector (even though there is a discount to NAV). The quality is also there, as the weighted average risk rating for CCAP's investments stands at 2.1, which means that the bulk of investments performs at or above the projections that were made once the loans were funded. The fact that the non-accrual base remains low at 0.9% of the portfolio FV is a clear proof of the solid portfolio quality. The only negative I see is that CCAP has and, to a large extent, continues to face headwinds on the deal activity front, which has disabled the Management from growing the portfolio in order to offset the systematic spread compressions that is relevant for almost all BDCs out there. In case a subdued M&A activity continues to persist for many quarters in the future, CCAP would eventually run into the problem of narrowing the dividend coverage to a level, which would introduce unnecessary risk of a potential dividend cut. However, the Q2, 2024 data points already revealed some encouraging activity as CCAP managed to invest $119 million in new asset, which was large enough to offset $73 million of organic repayment. Moreover, since the struggles to attract sizeable deal volumes are structural and affect almost all BDCs, it should not be a reason for the market to inject higher risk premium into CCAP's multiple or price it below BDC sector average P/NAV of 0.96x. The bottom line The current challenges in the BDC segment make it difficult to substantiate significant premium to NAV. At the same time, as the earnings and dividends continue to remain strong and the fears of lower interest rates leading to a value destruction are overexaggerated, having notable discounts to NAV would be wrong / not synchronized with reality.  In this article, I elaborate on two specific BDC picks, which trade at a significant discount to their NAV values, and when looking at the fundamentals, we will recognize that a large part of it is unjustified.","kind":"highlight","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":"4.29.3","shortVersion":"4.29.3","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/2464398455"}