LPC: BDC earnings signal modest growth

PennantPark Investment

06/05/2016 15:04

By Leela Parker Deo 
    NEW YORK, May 6 (Reuters) - Ares Capital Corp  ARCC.O , 
PennantPark Investment Corp  PNNT.O  and Solar Capital Ltd 
 SLRC.O  were among more than half a dozen business development 
companies (BDCs) to report quarterly earnings this week, with 
many more funds slated to post numbers throughout next week. 
    BDCs, a specialized type of closed-end investment fund that 
lends to privately-owned US mid-sized businesses, gained 
traction over the last several years as a key class of 
alternative capital providers seeking to gain market share as 
banks scaled back lending to smaller companies in the face of 
heightened regulatory scrutiny on leveraged loans. 
    However, more recently the investment vehicles have faced a 
range of pressures amid volatile market conditions, energy price 
swings and uncertainties about economic growth -- as well as 
rates hikes. Paired with highly competitive underwriting 
conditions and muted dealflow in middle market lending, this 
combination has weighed on share prices, portfolio yields and 
access to growth capital. 
    In this latest round of earnings, there are indications that 
BDC portfolio valuations have steadied, but capital remains 
constrained and growth prospects limited, according to analysts 
tracking the BDC segment. 
    On average the sector is trading at an 11% discount to Net 
Asset Value (NAV), a measure of a mutual fund's price per share, 
according to Thomson Reuters LPC data. Shares have rebounded 
since February, when the sector was trading at a steep 25% 
discount to NAV, but trading below NAV largely prohibits funds 
from raising new equity capital which is essential for growth. 
    Ares Capital, the largest BDC by total assets (US$9.4bn), on 
Wednesday declared a second quarter dividend of US$0.38 per 
share and reported net investment income of US$112.7m, or 
US$0.36 per share, for the first quarter of 2016, compared to 
higher net investment income of US$147.1m, or US$0.47 per share, 
for the period ended December 31, 2015. The dividend was 
unchanged. 
    "All in all, it was an okay quarter - all things 
considered," Wells Fargo analysts wrote in an equity research 
note on Ares Capital. "Remember, general deal activity remained 
anemic across the space in 1Q16 and, this was reflected in 
ARCC's seasonally slow originations/lower fee income." 
    Ares Capital's NAV, however, increased to US$16.50 per share 
from US$16.46 per share three months ago, reflecting improving 
asset prices resulting from subsiding market concerns, the 
analysts noted. 
    PennantPark's NAV slipped to US$8.83 from US$9.02 at the end 
of the prior quarter, but net investment income improved to 
US$20.8m in fiscal Q2 from US$16.8m in fiscal Q1. 
    Solar Capital said NAV increased to US$21.08 per share at 
March 31 from US$20.79 at year-end. Net investment income per 
share for the first quarter was US$0.40, fully covering its 
distribution to shareholders, according to a transcript from the 
company's earnings call. 
    Solar Capital attributed the improvement to the "combination 
of mark-to-market gains spurred by the late quarter market rally 
and fundamental improvements," of certain investments. 
    "Net growth for BDCs reporting so far has been pretty 
modest, and portfolio valuations have remained relatively steady 
with no major depreciation in portfolio values from market 
movements," said Meghan Neenan, senior director and BDC analyst 
at Fitch Ratings. 
    Asset quality is a mixed bag, however, she said. "Ares saw 
some nice improvement in non-accrual levels, Solar was flat (but 
low), BlackRock saw material deterioration - notably driven 
largely by non-energy investments." 
    Fitch has said that it is watching for signs of asset 
quality deterioration, and in its most recent report on April 25 
the rating agency noted that it will also be challenging for 
BDCs, despite a range of strategies and risk appetites, to 
manage leverage within targeted ranges. 
    At year end, leverage averaged 0.75 times for the peer 
group, up 7bp year over year, Fitch said. 
 
 (Reporting by Leela Parker Deo; Editing By Lynn Adler and Chris 
Mangham) 
 ((jonathan.methven@thomsonreuters.com; Reuters Messaging: 
jonathan.methven.thomsonreuters.com@reuters.net)) 
 
Keywords: BDC RESULTS/