Ares Capital Vs. Barings BDC: Only One Of These Big Dividends Is A Buy

seekingalpha11-22 22:15

Ares Capital and Barings BDC are two decent quality names, which put a heavy emphasize on investments outside the safest loan category.In the article I assess both BDCs comparing them side by side.I ...

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Barings BDC: Only One Of These Big Dividends Is A Buy","media":"seekingalpha","content":"<div>\n<p>Ares Capital and Barings BDC are two decent quality names, which put a heavy emphasize on investments outside the safest loan category.In the article I assess both BDCs comparing them side by side.I ...</p>\n\n<a href=\"https://seekingalpha.com/article/4739497-ares-capital-arcc-barings-bdc-only-one-of-these-big-dividends-is-a-buy\">Source Link</a>\n\n</div>\n","source":"seekingalpha","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Ares Capital Vs. 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Barings BDC: Only One Of These Big Dividends Is A Buy\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-11-22 22:15 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4739497-ares-capital-arcc-barings-bdc-only-one-of-these-big-dividends-is-a-buy><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Ares Capital and Barings BDC are two decent quality names, which put a heavy emphasize on investments outside the safest loan category.In the article I assess both BDCs comparing them side by side.I ...</p>\n\n<a href=\"https://seekingalpha.com/article/4739497-ares-capital-arcc-barings-bdc-only-one-of-these-big-dividends-is-a-buy\">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":"LU2360032135.SGD","symbol_name":"ALLSPRING GLOBAL EQUITY ENHANCED INCOME \"A\" (SGDHDG) INC","start_time":0,"source_url":"https://seekingalpha.com/article/4739497-ares-capital-arcc-barings-bdc-only-one-of-these-big-dividends-is-a-buy","article_id":"2485266188","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/473695236/image_473695236.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2485266188","pubTimestamp":1732284900,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Ares Capital and Barings BDC are two decent quality names, which put a heavy emphasize on investments outside the safest loan category.In the article I assess both BDCs comparing them side by side.I a","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"LU2360032135.SGD":"ALLSPRING GLOBAL EQUITY ENHANCED INCOME \"A\" (SGDHDG) INC","BK4585":"ETF&股票定投概念","BK4588":"碎股","BK4135":"资产管理与托管银行","LU2125154935.USD":"ALLSPRING (LUX) WF GLOBAL EQUITY ENHANCED INCOME \"I\" (USD) INC","ARCC":"阿瑞斯","LU2125154778.USD":"ALLSPRING GLOBAL EQUITY ENHANCED INCOME \"A\" (USD) INC"},"translate_title":"Ares Capital与Barings BDC：这些巨额股息中只有一项值得买入","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"ARCC":0.9},"content_text":"Ares Capital and Barings BDC are two decent quality names, which put a heavy emphasize on investments outside the safest loan category.In the article I assess both BDCs comparing them side by side.I also share my view why both are solid income picks with one being superior, especially for low risk and high yield investors.   maurusone/iStock via Getty Images  Ares Capital (NASDAQ:ARCC) and Barings BDC (NYSE:BBDC) are two well-established and large size BDCs, which have a relatively unique asset mix. Both BDCs rely heavily on non first lien loan investments as opposed to, for example, other popular and sound BDCs such as Blackstone Secured Lending (NYSE:BXSL), Morgan Stanley Direct Lending (NYSE:MSDL) or Blue Owl Capital Corporation (NYSE:OBDC). In theory, investments, which are made below the first lien lever in the capital structure are riskier because in case of a default, the odds of getting back meaningful amount of capital are much lower. On the flip side, by playing , for example, in the second lien, structured product or equity segments, BDCs can access higher yields and enjoy greater flexibility to cherry pick the most attractive capital deployment opportunities. In my opinion, it would be interesting to compare these two BDCs side by side to understand, which one of them offers the greatest risk and reward case, especially looking from the high and durable dividend investor perspective. Valuations and dividends From the P/NAV perspective (which is the most common way how to measure BDC valuations) the picture is quite simple. ARCC trades at a P/NAV of 1.09x, while the BBDC is in the discount territory, i.e., P/NAV of 0.87x. The gap is wide. As it is usually the case, the yields are higher for the security, which is priced below its net asset value. BBDC offers a dividend of 10.3%, whereas in ARCC's case we can lock in a yield of 8.8%. Looking at the chart below, we can also see how ARCC has delivered higher total returns than BBDC, which partially explains the existing disconnect in the valuations. Ycharts Having said that, the above-reflected price movements have been correlated with the dynamics at the underlying fundamental level. In other words, as I will explain a bit later, there has been a reason for why ARCC has outperformed BBDC and why we see disparity in the P/NAV metrics. Yet, if we isolate just P/NAV and dividend yields, we have to conclude that BBDC offers a nicer entry point for investors to both capture decent yield and profit from potential price convergence closer to the actual NAV. Portfolio structure Let's now peel the onion back a bit more. This will also be a moment, when we start to slowly recognize that ARCC's higher multiple / valuation is justified. As of Q3, 2024, BBDC had 68% of its portfolio invested in first lien loans, 16% in structured products, and the remaining 16% somewhat evenly spread across equity, JV, second lien, and mezzanine positions. ARCC has lower first lien exposure, accounting for 53% of the total AuM. The remaining chunk looks like this: 11% second lien, 10% preferred securities, 9% equity, and the rest (17%) split among subordinated, CLO and JV investments. In theory, since ARCC has less pronounced tilt towards first lien than BBDC, the risks could be higher. However, we have to contextualize this with the following aspects:  ARCC's NAV size is almost 10x larger than that of BBDC, which automatically introduces stronger diversification benefits. ARCC's portfolio company average EBITDA is $160 million, while in BBDC's case, usually, the EBITDA ceiling level for PE sponsored investments is $75 million (and the current portfolio company average EBITDA is even lower). This aspect decreases small-cap risk. The weighted average yield on ARCC's debt and other income-producing securities at amortized costs is 11.7%, which is 70 basis points higher than for BBDC. This is driven purely by the fact that ARCC has a more meaningful emphasize on allocations outside the core first lien structures.  However, an important statistic, which supports more the case for BBDC is the fact that ARCC's portfolio weighted average interest coverage ratio is 1.8x, while for BBDC the same metric is in a healthier zone - 2.2x. The mitigating factor for ARCC is that the base rates have started to move down, which should provide a favorable boost to the interest coverage levels across the board. Speaking of the portfolio quality statistics, it is especially important to highlight the potential risks that lie in BBDC's asset base. What I mean by this is that BBDC ended Q3, 2024 with 22% of the portfolio being classified as issuer, performing modestly or significantly below expectations. On top of this, a bit less than 2% (on a cost basis) is associated with non-accruals. In my opinion, this is exactly the key reason why BBDC is priced below NAV. The risks are quite meaningful that going forward, there will be some headwinds from non-accrual front. For ARCC the portfolio share that is attributable to investments performing below expectations is much lower, and more in line with other high quality such as OBDC and BXSL. Overall income durability While the previous section did not perhaps fully convince somebody that ARCC deserves a much higher multiple, here below it will become crystal clear why, in my opinion, ARCC is a superior income pick. In BDC business, what is equally important as portfolio quality and asset base is the other side of the balance sheet - i.e., leverage profile. At the core, BDC business is about maximizing spreads between investment yields and cost of capital. The lower the cost of capital, the higher the spreads or the more conservative BDC can be in its underwriting policy to deliver acceptable returns. Here, no matter where we look, we can safely conclude that ARCC is many steps ahead of BBDC. First, ARCC's leverage ratio stands at 106%, which is not only below BBDC's level of 114%, but also below sector average. Second, the leverage itself for ARCC is the cheapest in the entire BDC space. This is driven by the fact that it is the only BDC with higher investment grade notch (assigned by all three major rating agencies). An additional aspect to appreciate here is also the enhanced flexibility to attract debt financing on favorable terms that usually comes with a strongly rated balance sheet. Third, and this is indirectly related to capital structure, but directly related to the income durability - ARCC has a base dividend coverage of 1.19x, which is 0.06x above that of BBDC. For both BDCs (and especially for ARCC), so decent base dividend coverage levels allow operating with retained equity, when funding new investments. This, in turn, relaxes the pressure from balance sheets, rendering the overall growth story more sustainable. Finally, the most important advantage for ARCC is its ability to originate massive volumes of deal flow. As the M&A markets come back in vogue, it will be critical for BDCs to access those transactions at the scale from which it could nicely cherry-pick optimal risk and reward investment cases. If we put this together with ample debt capacity on the books, we could arrive quite quickly at a compelling cash flow growth story going forward. For example, during Q3, 2024 BBDC managed to achieve a positive net funding volume of ~ $4 million, which really does not move the needle on the portfolio level. Instead, the net funding volume for ARCC has come in at ~$741 million, which is a rather tangible figure even considering ARCC's portfolio size. ARCC has also been one of those rare BDCs that have avoided negative net funding volumes over the last twelve-month period. The bottom line In my humble opinion, both ARCC and BBDC deserve a place in income-oriented portfolios. For me as an investor, who is willing to sacrifice a bit on yield to enhance the income sustainability aspect, ARCC seems as a better pick. Granted, ARCC trades at a premium over NAV and has \"only\" 8.8% yield, compared to BBDC, the odds of experiencing a dividend cut are very limited.  Having said that, BBDC embodies some defensive fundamentals as well such as conservative capital structure, well-covered base dividend, and low non-accrual base. Yet, as the discount indicates, the risks are higher mostly due to a meaningful part of the portfolio located outside companies, which perform in line with the initial expectations, when the loan investments were signed.","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":"analysis","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":"4.29.2","shortVersion":"4.29.2","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/2485266188"}