Showing posts with label TCAP. Show all posts
Showing posts with label TCAP. Show all posts

Monday, August 22, 2011

To DRIP or Not to DRIP (Seeking Alpha Article)

I just posted a Seeking Alpha article over here that outlines BDCs and whether or not reinvesting your dividends is worthwhile.

The companies to be examined for this article will be American Capital (ACAS), Apollo Investments (AINV), Ares Capital Corp (ARCC), Blackrock Kelso Capital Corp (BKCC), Kohlberg Capital (KCAP), Main Street Capital Corporation (MAIN), PennantPark (PNNT), Prospect Capital (PSEC), Solar Capital (SLRC) and Triangle Capital Corp (TCAP).

Wednesday, January 12, 2011

Net Investment Income Overview

Net Investment Income (NII) is one of the most important factors when evaluating a BDC. NII as a definition is a measure of the income received from investment assets (bonds, stocks, funds, loans and other investments) minus equivalent investment expenses. For a BDC, this number measures how well their investments are performing. As a simple way of breaking this information down, I am pulling in the balance sheet from TCAP's Q3 earnings release to illustrate.

Investment income:
Loan interest, fee and dividend income:
Non—Control / Non—Affiliate investments
6,654,541
Affiliate investments
1,044,088
Control investments
333,993
Total loan interest, fee and dividend income
8,032,622
Payment—in—kind interest income:
  
Non—Control / Non—Affiliate investments
1,338,018
Affiliate investments
231,525
Control investments
117,419
Total payment—in—kind interest income
1,686,962
Interest income from cash and cash equivalent investments
67,501
Total investment income
9,787,085
Expenses:
  
Interest expense
1,864,442
Amortization of deferred financing fees
469,394
General and administrative expenses
1,840,794
Total expenses
4,174,630
Net investment income
5,612,455


Basic line by line breakdown:
Non-Control / Non-Affiliate Investments - These represent the bread and butter investments of a BDC - extending capital (most of the time in the form of term loans) to firms to collect interest. You would expect the majority of a firm's NII to come from this line.

Affiliate Investments - This means that TCAP has some type of influence or relation to these companies. Such situations could be: a person in TCAP sits on the board of the company (or if an officer), holds either directly or indirectly 5% or more of the outstanding voting securities or if the affiliated company is an investment company, TCAP has seeded the company.

Control Investments - Will let the 1940 take it from here - "Control" means the power to exercise a controlling influence over the management or policies of a company, unless such power is solely the result of an official position with such company. From what I have seen, a BDC likes to avoid controlling a firm as that is not the specialty of the BDC. Also, it tends to take considerable personnel power to both manage another company as well as your entire portfolio.

Payment in Kind Interest Income - Quick sub-note on this. http://en.wikipedia.org/wiki/PIK_loan

Interest Expense - This is the expense that the company pays on the leverage it issues (loans/bonds) to make investments. A BDC will take out a Loan (most likely a Revolver) because they make money off of the spread. If a BDC pays interest at LIBOR+200 and can lend that money out at LIBOR+500, it is doing OK. This is the same principal on how a traditional bank makes money. Take in deposits and pay a certain rate and lend money out at a higher rate. Remember, a BDC must be in compliance with a max 1:2 Leverage to Assets ratio (200% test).

Amortization of deferred financing fees - These are the costs incurred with issuing debt such as commissions paid to investment banks, auditors, lawyers, etc. These fees are amortized because of accounting reasons which you can easily lookup online.

General and administrative expenses - The incredible catch all which includes costs of doing business. For example, if a business professional is evaluating a potential portfolio company, they can expense (within limits) travel costs and acquisition costs.


What does this all mean?
Well, from looking at those lines, we see that TCAP has a positive NII and if you divide that by the number of outstanding shares, you get to a NII of 0.46 per share. This is important because that means TCAP is currently covering their dividend of 41 cents (now 42 cents) with their NII. This is important when you look at a BDC. There are a number of BDCs that currently have a dividend shortfall (future post). If a BDC is not covering their dividend with NII, then you have a problem with a BDC selling assets to make payments or even going Ponzi by paying out dividends from equity and leverage raises.

Monday, January 10, 2011

BDC Weekly Roundup 1/10/2011

The BDCR Index rose by 1.24% from a level of 314.72 on 1/3/2010 to 318.66 for the week ending 1/7/2010. The major winners were HRZN (+7.6%) and MVC (+3.5%) and the major losers were FSC (-1.55%) and KCAP (-1.48%).


Some notable news items:

ACAS - Cramer said to stay away from ACAS, http://www.cnbc.com/id/40885039?__source=yahoo|headline|quote|text|&par=yahoo
FSC - Had a record quarter of closings http://finance.yahoo.com/news/Fifth-Street-Finance-Corp-pz-1575909448.html?x=0&.v=1
GAIN - Glad sold off Chase Doors, http://finance.yahoo.com/news/Gladstone-Investment-prnews-4274206846.html?x=0&.v=1
MAIN - Made two new investments totalling $11.4m and expanded their credit facility
TCAP - Made a $9m investment in SRC