2nd Business Development Company Lowers Asset Coverage

PennantPark Floating Rate Capital LTD. (NASDAQ:PFLT), which is a business development company (BDC), has lowered their asset coverage from 200% to 150% as allowed by the Cnsolidated Appropriations Act of 2018 (the budget). The change is effective 4/5/2019.

What this means is that the BDC no longer has to have 200% coverage for senior securities–meaning baby bonds and preferred stock.

As an investor in senior securities in baby bonds and preferred stocks of BDC’s we think this is reason for concern. One of the reasons we buy these senior securities is because of the margin of safety provided by the asset coverage. With reduced coverage the risk rises for senior security holders so in theory the coupons on new issuance should rise–we shall see.

Business Development Companies hold many assets that can only be valued via Level 3 observation–in other words “just trust me” when it comes to asset valuation.  Unfortunately we can’t always trust management to use good judgement and in particular when the economy comes under stress.

While we will not stop investing in the senior securities of BDC’s we will give them extra scrutiny when the quarterly reports are issued.

The company’s press release can be read here.

Previously Apollo Investment (NASDAQ:AINV)  announced a similar change effective 4/4/2019.  Their press release is here.

It should be noted that most BDC’s are also closed end funds. The leverage change only affect BDC’s at this time.  Stock CEF’s are still required to maintain 200% asset coverage ratio.

 

3 thoughts on “2nd Business Development Company Lowers Asset Coverage”

  1. Hello Tim
    I learned (painfully) with both PSEC and FSC that mgt. can’t be trusted. If there are questions about mgt., I don’t invest there.

    1. All BDC’s are about ‘just trust me’—I don’t think I have owned a BDC, but their debt I can handle but would exit even that if the economy was in–or heading to a recession–just can’t trust portfolio quality.

  2. Financials don’t look that bad, actually, IMO. I used to own this stinker years ago but left it in the dust with all BDC’s to never be invested in again.

    Will be interesting what they say on the next earnings conference call. Surely they’ll have some questions to answer. It’s possible they’re lowering the coverage ratio just because they can and not because they anticipate problems on the horizon. Who knows…

    Stock price took a small hit today, but that may also be attributed to a down day across the board.

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