BDC New Mountain Finance (NYSE:NMFC) has announced it is seeking approval from shareholders to lower their asset coverage ratios from 200% to 150%. The change would be effective in about a year.
NMFC claims this will allow them to “earn their dividend”. NMFC currently has a yield of over 10%. Seems to me investors are already telling them there is plenty of risk in the business–if they didn’t think so they wouldn’t be demanding a 10% yield.
When we hit the next recession we will wave goodbye to some BDC’s as there should not be any doubt in anyone’s mind that the more “rope” you hand a BDC the more likely they are to use the rope to hang themselves. Remember that we are already in the position with most BDC’s to “just trust them” to value their assets correctly for coverage purposes–now we have to trust them a little more.
Disclosure–we own term preferred shares of Gladstone Investment and Gladstone Capital–both BDC’s