Q1 BDC earnings offer clearer window into individual firm performance

Volatility in Q4 2018 dragged on performance across the market, but a dispersion of results in the first quarter offer a more accurate reflection.

Earnings results for public business development companies were down across the board at the end of 2018 due to market volatility, but with credit markets now stabilised, first quarter results paint a clearer picture of BDCs’ individual performances over the last six months.

The majority, if not all, of public BDCs’ net asset values per share were trending negatively at the end of the fourth quarter, with volatility in the broadly syndicated loan market receiving most of the blame.

While that catalyst didn’t explain every BDC’s losses, it clouded the results to the point that many earnings calls used language such as “mainly caused by” or “primarily due” to describe the volatility’s impact on losses.

Now that the market has stabilised, the latest round of earnings results showed a more scattered market, which is normal, and a more accurate depiction of the value of each vehicle’s assets.

BDCs like Ares Capital Corporation showed that the fourth-quarter volatility did not have a significant impact on performance. The BDC saw a net asset value per share loss of less than 1 percent, from $17.16 in the third quarter to $17.12 in the fourth quarter, according to LPC BDC Collateral.

The firm attributed this slight decrease to markdowns due to volatility and has since grown its NAV per to $17.21 as of 31 March.

“We’ve shown a long history of both growing our dividends and increasing our NAV, which is the ultimate measure of our performance as a company,” Kipp DeVeer, ARCC’s chief executive officer, said on the BDC’s fourth-quarter earnings call.

Other players, like Hercules Capital (HTGC), took a harder hit from the fourth-quarter volatility and experienced a 4 percent drop in its NAV per share. David Lund, HTGC’s then-interim chief financial officer, attributed $33.5 million of the $47.1 million in unrealised losses to the volatility, which based on the BDC’s first quarter results, proved to be true, as the NAV per share climbed back up 3 percent.

HTGC’s robust 3 percent gain comes despite the well-publicised exit of former HTGC chief executive Manuel Henriquez during the first quarter of 2019 due to his alleged involvement in the “Varsity Blues” college admissions scandal.

Despite the markdowns and its CEO’s departure, these first-quarter results show a strong asset portfolio and investor confidence, which was not apparent at the end of 2018.

While some players were able to flex their recovery muscles, the first-quarter results also revealed that the breakdown of some BDC’s fourth-quarter losses were clouded by the impact of the market volatility.

BDCs like Medley Capital Corporation (MCC) experienced a sharp NAV per share decline during the fourth quarter, which dropped the BDC’s NAV by $0.29 a share. MCC CEO Brooke Taube said on the firm’s fourth-quarter earnings call that the decline was partially (3.8 percent) due to the market volatility and 1.1 percent due to excess payments of net investment income.

With the majority of the decline being attributed to market volatility, one could predict that once the market stabilised, some of the asset value would creep back up.

However, MCC ended the first quarter with double the losses than in the fourth quarter, with NAV dropping almost 9 percent. Taube attributed the one-half of the losses to litigation costs and the other half to credit marks. The further markdowns in the first quarter make it less clear which were attributed to volatility and which were the result of other factors.

Many other BDCs fell somewhere in the middle, with their first-quarter earnings and reported results typical of historical performance, such as Bain Capital Specialty Finance (BCSF) and Prospect Capital Corporation (PSEC).

Both cited market volatility as a factor to the BDCs’ losses during the last three months of the year.

BCSF said the 3 percent decline in its NAV per share from the third quarter to the fourth quarter was caused mainly by market volatility.

In the first quarter though, the firm rebounded that figure, with its $19.81-a-share NAV up as of 31 March up from its $19.46-a-share NAV it reported at year end, data from BDC Collateral showed. The rebound put the first quarter NAV per share only 1 percent below the figure reported at the end of the third quarter.

PSEC attributed about half of their losses to the volatility and also bounced back slightly in the first quarter. The firm saw a 3. 9 percent decline in its NAV per share in the fourth quarter, but in the first quarter reported a NAV per share that was down 3.3 percent compared to the third quarter.

For the fourth-quarter earnings results, how the volatility impacted different BDCs wasn’t always clear. Looking at both the fourth-quarter and first-quarter results side by side, the latest batch shows differing patterns across the market, which puts a more accurate spread on display.