A Debtwire Middle Market Special Report 2Q17 BDC Health Quarterly Overview of the BDC Industry
2Q17 Debtwire Middle Market CONTENTS OVERVIEW: 3 METHODOLOGY: 4 DISCOUNTED HOLDINGS AND STOCK PRICE/NAV: 5-6 INDUSTRY-WISE DISTRESSED EXPOSURE: 7 LEVERAGE - DEBT/ASSETS: 8 NET INVESTMENT INCOME: 9 BDC MARKET PERFORMANCE: 10 CONTACT INFO: 11 Page 2
2Q17 Overview The BDC Health Report BDCs have now become an integral part of the middle market space. The BDC count has grown exponentially from 5 to 10 a few years back to ~ 60 today. Debtwire Middle Market s BDC Health Report features financial statistics and key portfolio measures for the ~40 public BDCs that we cover, from the universe of ~55 public BDCs. The analysis in this report illustrates a high-level overview of our coverage universe as of the most recent quarter, 2Q17. The report features various individual and industry-wide BDC performance data and comparative analysis. Part of our analysis includes a graph which displays the percentage of assets marked below 9 face value and 8 face value (defined as fair value divided by principal, per public filings) for each BDC under our coverage, to highlight portfolio distress. Similar to the BDCs, our focus is on middle market corporate debt and hence we exclude CLO and equity investments. We also highlight stock price/nav, an important market performance metric for BDCs, strongly related to capital markets accessibility. Additionally, we ve highlighted debt/asset ratio for each BDC, indicating leverage. In our analysis we also focus on industry-wise exposure of below 9 face value loans as a percentage of total assets. We continue to see portfolio distress in certain sectors, like energy, retail and healthcare. Concerning market performance, our report features analysis on stock returns and dividend yields, including comparisons to other yield products. Lastly, the attached spreadsheet highlights net investment income, total assets and the ratio of that for last four quarters, displaying the trend for each BDC under our coverage. For 2Q17, we have added Carlyle s BDC, TCG BDC, Inc. (CGBD) to our coverage. An increased supply of middle-market direct lenders continues to be a theme for the sector and a possible concern for BDCs, considering the excess liquidity in the space. As tolerance for borrower friendly conditions persist, BDCs (especially those with less robust origination platforms) may face lower quality opportunity sets. We expect BDCs to remain especially cautious when financing deals in the retail (including food & beverage) industry, given the distress in the sector. We also continue to see a steady supply of BDC portfolio distress from energy sector loans. Page 3
2Q17 Methodology Methodology Debtwire Middle Market s BDC Health Report features financial statistics and key portfolio measures for the ~ 40 largest public BDCs in terms of market capitalization that we cover. The analysis in this report illustrates a high-level overview of our coverage universe as of the most recent quarter. Similar to the BDCs, our focus is on middle market corporate debt. For our calculation of the percentage of assets marked below 9 face value, the total portfolio does not include CLO and equity investments, which may include a meaningful portion of a BDC s portfolio composition. BDCS UNDER COVERAGE AS OF 2Q17 AINV CGBD Page 4
AINV CGBD AINV 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 1 1 1 1 1 1 1 3 1 1 AINV CGBD AINV 0.5x 0.7x 0.7x 1.3x 0.7x 0.7x 1.3x 0.6x 0.5x 1.7x 1.3x 1.6x 1.7x 1.3x 1.3x BDC Health Report 2Q17 Discounted Holdings and Stock Price/NAV 2Q17 - STOCK PRICE/NAV 1Q17 - STOCK PRICE/NAV 1.8x 2Q17 Stock price/nav Minimum bar to raise additional capital 1.8x 1Q17 Stock price/nav Minimum bar to raise additional capital 1.6x 2Q17 Stock price/nav 1.6x 1Q17 Stock price/nav 1.4x Minimum bar to raise additional capital 1.4x Minimum bar to raise additional capital 0.6x 0.6x 0.4x 0.4x 0.2x 0.2x 0.0x 0.0x 2Q17 - BELOW 95C AND 80C AS A % OF TOTAL ASSETS 1Q17 - BELOW 95C AND 80C AS A % OF TOTAL ASSETS 5 2Q17 <95c/total assets 2Q17 <80c/total assets 5 1Q17 <95c/total assets 1Q17 <80c/total assets 4 4 4 3 3 4 3 3 2 2 2 2 1 1 1 1 Page 5
2Q17 Discounted Holdings and Stock Price/NAV Discounted Holdings and Stock Price/NAV OVERVIEW: The graphs on the previous page show the loans marked below 9 and 8 as a percentage of total assets and the stock price-to-nav ratio for each of the BDCs under Debtwire coverage. In 2Q17, there were 14 BDCs trading at a stock price/nav ratio of more than, the minimum bar to raise additional capital, a decrease from 19 BDCs last quarter. The average stock price/nav ratio continues to remain steady at. and saw strong improvements in reducing exposure to assets marked below 9, while and saw large increases in exposure to stressed assets., which has a relatively small portfolio, continues to have the highest exposure to distressed assets. Page 6
2Q17 Select Industry-wise Distressed Exposure BDC Manufacturing (other) Energy Healthcare Media Retail Consumer: Foods Alcentra Capital Corp () 3. 4. Apollo Investment Corporation (AINV) 1. 0. Ares Capital Corporation () 0. 2. 2. 0. 0. Fidus Investment Corporation () 3. FS Investment Corporation () 0. 0. 0. 0. Garrison Capital Inc () 1. 1. Gladstone Capital Corporation () 3. 2. 0. 1. Goldman Sachs () 2. 1. Hercules Technology Growth Capital () Financial Inc () 2. 2. 0. Main Street Capital () 1. 0. 0. 0. 2. Medley Capital Corp () 2. 2. 1. PennantPark () 6. Prospect Capital Corporation () 0. 1. Solar Capital Ltd () 0. TPG Specialty Lending () 0. Triangle Capital Corporation () 5. 1. 0. 0. 0. 0. Whitehorse Finance () 2. 2. 2. Pennantpark Floating Rate Capital Ltd () 0. 1. 1. 0. Gladstone Investment Corporation () 5. CM Finance Inc () 9. 5. 5. Solar Senior Capital Ltd () Fifth Street Senior Floating Rate Corp () 2. 4. TCP Capital Corp () 0. 0. 0. Golub Capital BDC, Inc. () 0. 0. 0. 0. Fifth Street Finance Corp () 0. 7. THL Credit, Inc. () 2. 3. 2. Blackrock Capital Investment Corp () 1. Horizon Technology Finance Corp () 5. Monroe Capital Corp () 0. 0. 1. 2. 1. Capitala Finance Corp () 3. 0. 1. 1. Capital Corp. () OHA Investment Corp () 5. Capital Corp () 1. 0. 1. TriplePoint Venture Growth BDC Corp () 1. American Capital Senior Floating Ltd () 1. 1. 0. 0. Harvest Capital Credit Corp () Stellus Capital Investment Corp () 1. New Mountain Finance Corporation () 0. TCG BDC Inc (CGBD) 3. 0. Portfolio distress related to energy assets continues to be common, as three BDCs had exposure to distressed energy assets at over (unchanged QoQ). and had a relatively high concentration of distressed credits in the manufacturing industry. s exposure to underperforming healthcare portfolio companies continues to increase. Portfolio stress from food sector loans seems to be widespread, although each BDC appears to have only moderate exposure.. Page 7
AINV CGBD BDC Health Report 2Q17 Leverage - Debt/Assets LEVERAGE - DEBT/ASSETS (2Q17) 6 Debt/Assets Avg Debt/Assets 5 4 Avg Debt/Assets 39. 3 2 1 5 5 5 5 4 4 44 4 3 3 4 4 4 4 44 4 4 4 4 4 33 3 3 3 3 3 3 3 3 3 3 2 2 2 1 1 OVERVIEW: The debt/assets chart above demonstrates the current leverage level for the BDCs under Debtwire s coverage. As of 2Q17, the average debt/assets ratio was 39., a second consecutive QoQ decrease. This quarter, has the highest leverage ratio at 5. s ratio decreased considerably to 2, from 5 in 1Q17. Page 8
AINV CGBD BDC Health Report 2Q17 Net Investment Income NET INVESTMENT INCOME 100 2Q17 1Q17 4Q16 3Q16 2Q16 0.4 80 60 40 20 0-20 -40-60 36.1 39.5 36.4 105.3 137.7 138.0 21.6 17.1 94.0 14.6 18.7 33.3 124.013.9-2.1 7.4 7.4 6.7 6.2 0.7 4.9 1.4 56.8 5.5 18.2 2.1 23.6 32.7 5.8 4.5 21.9 17.8 5.1 113.0 19.5 23.1 12.0 6.8 26.0 16.3 6.4 5.8 5.9 18.3 5.0 6.8 4.1 6.2 29.1 14.7 6.7 2.9 25.7 49.0 2.6 4.9 18.7 3.0 23.8 25.7 5.9 21.8 31.3 15.8 7.3 4.5 6.5 5.6 8.2 42.7 16.1 17.0 4.8 23.7 5.9 4.3 10.8 4.5 81.4 7.8 4.8 23.3 51.5 4.9 18.1 5.2 2.4 33.1 10.1 22.9 23.6 7.3 26.5 17.1 5.6 7.2 5.4 30.4 15.0 17.6 6.1 6.8 8.0 5.9 17.0 3.8 84.4 3.3 4.1 7.9 7.9 18.0 24.9 52.6 4.2 5.4 2.2 22.7 31.2 8.0 23.4 9.7 7.9 28.5 17.8 6.5 6.0 5.6 16.3 4.6 18.5 3.7 16.2 16.5 8.0 5.1 73.1 3.2 8.9 4.6 5.4 24.1 3.4 2.5 25.3 19.4 32.7 9.6 46.5 25.8 2.8 2.6 12.5 67.2 16.1 31.0 10.2 7.5 30.3 19.4 6.9 6.1 8.8 4.8 17.8 7.0 5.9 5.7-3.3 1.3 1.7 1.7 0.2 0.1 4.0 3.5 12.3 4.4 3.0 6.8 3.3 15.8 4.6 3.6 3.1 5.1 3.7 19.5 4.7 4.9 2.8 5.2 3.3 19.1 4.4 3.4 3.1 5.3 8.0 4.9 21.4 3.8 2.4 5.4-80 -100 OVERVIEW: Most BDCs have continued to generate relatively stable, positive net investment income (NII). In 2Q17, and had large YoY increases in NII, while and had large YoY decreases in NII. Page 9
AINV CGBD 10. 9. 10. 9. 12. 9. 8. 10. 10. 11. 14. 5. 10. 9. 9. 10. 7. 8. 11. 11. 10. 7. 13. 3. 10. 12. 8. 11. 8. 2. 8. 8. 10. 10. 10. 9. 8. 17. 9. AINV CGBD -45. -33. -1. -5. -2. -22. -10. -6. -9. -7. -15. -24. -30. -16. -2. -4. -21. -1. -4. -11. -3. -13. -14. -1. -4. -3. -1. -4. -5. 8. -1. -9. -5. -0. -1. 5. 10. 12. 3. 0. 5. BDC Health Report 2Q17 BDC Market Performance BDC YTD STOCK RETURNS VS. ETF RETURNS 15. OVERVIEW: 5. -5. -15. -25. -35. -45. 5. High Yield ETF (HYG) 4. BDC ETF (BIZD) 3. REIT ETF (VNQ) -1. MLP ETF (AMLP) The relative performance for the BDCs continues to be fairly strong when compared to other yield products such as REIT and MLP. However, BDC ETF s (BIZD) YTD return has deteriorated to 4.. It was 8. as of 1Q17. High Yield ETF, HYG (5. return) has outperformed BZID thus far in 2017., and are the lowest performing stocks YTD in 2017. BDC DIVIDEND YIELDS VS. ETF YIELDS 16. 14. The BDC ETF dividend yield continues to be most attractive (~7.), as compared to other yield products. 12. 10. 8. 6. 4. 7. BDC ETF (BIZD) 7. MLP ETF (AMLP) 5. HY Corp Bond ETF (HYG) 4. REIT ETF (VNQ) While was the lowest performing stock, its dividend yield was the highest at 17.. CGBD, our newest addition to coverage, IPO ed in June 2017, and had a yield of 8.. 2. 0. 8. 8. Page 10
2Q17 Contacts Debtwire Middle Market Editorial Debtwire Middle Market Research Sales Jon Berke, Middle Market Editor, Debtwire North America +1 212 686 2741, jon.berke@acuris.com Suneet Chandvani, Head of Mid-Market Research +1 646 378 3170, suneet.chandvani@acuris.com Jonathan Reed, Managing Director +1 212 686 5418, jonathan.reed@acuris.com Bill Weisbrod, Reporter +1 212-500-1399, bill.weisbrod@acuris.com Alex Federbusch, Analyst +1 212 500 7554, alex.federbusch@acuris.com Brian Fitzgerald, Head of Debtwire Sales Americas +1 212 686 5277, brian.fitzgerald@acuris.com Rachel Butt, Energy Reporter +1 212-500-1387, rachel.butt@acuris.com Amol Shinde, Middle Market Analyst +91-22-61331670, amol.shinde@acuris.com Tanvi Acharya, Reporter +1 646-378-3142, tanvi.acharya@acuris.com Rahul Ramaswamy, Middle Market Analyst +91-22-62351533, Rahul.Ramaswamy@acuris.com Page 11
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