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Category: BDC

BDC Capital Southwest Continues Good Performance

Today business development company Capital Southwest (CSWC) released their earnings and as I have come to expect their performance remained pretty darned good.

I have a meaningful position in the company’s 7.75% baby bonds (CSWCZ) which I bought when the bonds were sold in 6/23. The company has performed well for as long as I have watched them–maybe 2-3 years. The baby bonds mature 8/1/2028 so a bit less than 4 years.

I am mentioning this particular issue because it is the type of holding I like to have when interest rates are moving higher. 1st off it is relatively high yield. 2ndly it has an early call available to the company in 2025 (unless rates fall there are low odds of a early call) with maturity in 2028. The high yield helps to maintain pricing levels as interest rates move higher (as long as it doesn’t get crazy) while the maturity date will keep the price close to $25 even with higher interest rates. The issue just went ex-dividend 10 days ago and had been trading at $26–now at $25.65–I paid under $25 a few cents for it so I have capital gains. There is almost zero chance of me selling this issue unless the ‘wheels come off’ the company–a perfect fit for me.

So for my BDC holdings I like to look over the financials when earnings are released. I don’t dig into the details of which companies they are invested in–these are mainly smaller company’s that one has never heard of and it is not meaningful to me to look at each individual investment. I look at an overview of the types of loans they make–I want mostly most 1st lien senior secured debt–in this case CSWC has 98% in this category. Then I want to know the non-accruals – are they reasonable? CSWC has 3.5% of the total portfolio of loans on non-accrual which is a number that is acceptable for a BDC. investment income was down $3 million quarter over quarter–but reduced expenses of $1.5 million helped to offset the reduced investment income.

The net asset value per share is $16.59 as compared to $16.60 last quarter. It is not unusual to see net asset value fall quarter to quarter–a 1 cent fall is pretty good. If I were to see NAV falling 20, 30 or 40 cents in a quarter I would be pretty concerned as it would likely mean they aren’t covering their dividend.

With BDCs, just like the CLO closed end funds, I like to see the company sell equity with an ‘at the money’ share sale program. CSWC has $412 million available on an ‘at the money’ program and during last quarter they raised $20 million selling equity at an average price of $24.49. The more equity they raise the better they ‘cover’ senior securities like the baby bonds we own.

All in all a fine company—here is their investor presentation.

If the shares price were to fall another 25-30 cents I would add to this position.

Watch the BDCs

I have noticed several articles lately about business development companies starting to show stress from bad debt. I have had concerns about this since the 1st interest rate hike from the Fed. It only makes sense that BDCs would start to show stress—they already lend at very high interest rates which is to a large degree floating rate debt meaning that the smaller companies that they lend to have generally seen rising debt service costs.

Recently there was a Seeking Alpha article on some Moodys credit rating moves (or at least potential moves) placing some BDCs on negative credit outlook–not downgrading yet, but seeing signs of higher loan losses, etc.

I am interested because I hold baby bonds issued by 4 different business development companies which can be seen in my laundry list.

Here is an article in chief investment officer magazine. Here is another in Seeking Alpha. Here is one more in Private Debt Investor.

The question of course is will this worsen? Almost without a doubt. Am I concerned? Yes, I am a bit concerned, but not at a point where ‘action’ is necessary–BUT I will need to keep a close eye on information being released from the companies.

BDCs Forecast to Have a Tough 2024?

Thanks to 2whiteroses for catching this blurb.

Here is a link to a short blurb put out a couple weeks ago by the Fitch ratings agency–I had not seen this and thought it might be of interest to others.

Note that the full article requires a subscription (of course it does), but maybe folks can find it elsewhere on the web.

Of course we all have opinions–but the more opinion the better.

BDC Gladstone Investment Selling New Bonds

Business development company Gladstone Investment (GAIN) is selling a new issue of notes with a maturity on 8/1/2028

The notes will have a early redemption option for the company starting 8/1/2025.

GAIN has 2 other baby bond issues currently outstanding which can be seen here.

The preliminary prospectus is here.

Thanks to J for posting this.