Over the coming months, I will be publishing a series of articles discussing how to build a balanced retirement portfolio using the common stocks of BDCs currently yielding approximately 12% and their safer securities – yielding baby bonds/preferred stocks – with maturities ranging from 6.5 % to 9.0%. This article Discusses the The main street of the capital (New York Stock Exchange: Main) currently yields about 8.3% (including additional dividends, discussed later), and its 2026 bond/bonds (CUSIP: 56035LAE4) have a yield to maturity of about 7.5%.
MAIN is intended for low-risk investors who have the ability to benefit from an internally managed cost structure and 99% of its debt investments in first-franchise centres. MAIN also has an excellent history of NAV per share growth with lower amounts of non-accrual investments and an excellent balance sheet that includes flexible, low-cost unsecured loans.
Business development companies invest shareholder capital in privately owned, small and medium-sized companies Mid-sized US companies generate income from secured loans and capital gains from equity positions, much like venture capital or private equity funds.
The Business Development Companies (BDCs) in the chart below represent approximately 90% of the total assets and market capitalization of the sector. Over the course of three months, we discussed the portfolio’s credit quality and/or dividend coverage for most of them, including Ares Capital (ARCC), FS KKR Capital (FSK), Blue Owl Capital (OBDC), Blackstone Secured Lending (BXSL), and Prospect Capital. (PSEC), Golub Capital BDC (GBDC), Goldman Sachs BDC (GSBD), Oaktree Specialty Lending (OCSL), New Mountain Finance (NMFC), Hercules Capital (HTGC), Sixth Street Specialty Lending (TSLX), and PennantPark Floating Rate Capital . (PFLT), PennantPark Investment (PNNT), BlackRock TCP Capital (TCPC), Gladstone Investment (GAIN), Gladstone Capital (GLAD), Monroe Capital (MRCC), Trinity Capital (TRIN), and TriplePoint Venture Growth (TPVG) in the following articles :
Many readers wonder where BDC stocks and bonds fit into their overall portfolio. Your investment portfolio allocations depend on several factors, including your age, general risk appetite, investment time frame, and need for access to capital.
BDC is intended for long-term investors, so please allow an investment time frame of at least three years. The following charts use simplified asset classes of cash, Treasuries, corporate bonds/bonds, other stocks (common market stocks), and high-yield investments (including BDCs) along with some examples from allocations and my personal portfolio (not exact):
The table below uses what I consider to be conservative estimates of annual total returns (dividends plus capital gains) and takes into account current price levels.
Most business development firms typically do not invest directly in travel, entertainment, retail, restaurants, sporting event-related businesses, airlines, oil/energy, etc., and if they do, it is a small portion of the portfolio. MAIN has a highly diversified portfolio of 211 companies across many industry sectors:
Nine investments remain in non-accrual status, approximately 0.3% (previously 0.6%) of the investment portfolio at fair value and 1.7% at cost (previously 3.2%). I will discuss some of these investments in a follow-up article focusing on credit quality.
As shown below, MAIN continues to focus on the Lower Middle Market (“LMM”) portion of the portfolio with higher yields currently at approximately 13%.
We are very pleased with our quarterly results, which included continued positive results from our lower middle market and private equity investment strategies and significant contributions from our asset management businesses. Our performance was highlighted by a return on equity of 19% and new quarterly records for net investment income per share, net distributable investment income per share, and net asset value per share for the fourth consecutive quarter. The continued strong performance of our LMM portfolio companies in the second consecutive quarter was highlighted with a new record level of dividend income from our portfolio equity investments. We believe these results demonstrate the continued and sustainable strength of our comprehensive platform, the benefits of our diversified and diversified investment strategies, the unique contributions of our asset management businesses and the fundamental strength and quality of our portfolio companies. We are also pleased with the level of investment activity during the quarter in both our LMM and private loan portfolios and the healthy line of investment opportunities in these investment strategies. This attractive investment pipeline, combined with our conservative liquidity position and capital structure, provides us with a continued positive outlook for the third quarter.
Key earnings and coverage ratios
MAIN has excellent dividend coverage with Possibility of increasing additional profits and/or supplemental dividends, mostly due to continued improvement in net interest margins as well as increased net asset value per share and realized gains. As mentioned in previous articles, I expect additional earnings increases over the coming quarters due to:
- Higher portfolio returns due to wider investment spreads and higher rates.
- Portfolio growth (increased interest income).
- Higher returns from asset management business (MSC Income Fund).
- Continuing dividend income from portfolio companies.
MAIN recently announced an increase to its regular monthly dividend from $0.230 to $0.235 per share for the fourth quarter of 2023 as well as another supplemental dividend of $0.275 per share for the third quarter of 2023.
Net distributable investment income in the second quarter exceeded the monthly dividends paid to our shareholders by 66% and the total dividends paid to our shareholders by 24%. This strong performance has allowed us to deliver significant value to our shareholders, while conservatively maintaining a significant portion of our income and increasing our net asset value per share. Additionally, our strong second quarter results and positive outlook for the third quarter led to the announcement An increase in our monthly dividend for the fourth quarter of 2023 and an additional dividend of $0.275 per share. They will be paid in September 2023. The September 2023 supplemental dividend represents the largest and eighth consecutive quarterly supplemental dividend, along with five increases to our regular monthly dividend over the same period, and results in a 30% increase in total dividends paid in the third quarter of 2023. And a 24% increase in total dividends paid from the beginning of the year to September 30, in both cases compared to the previous year.
The Interest Expense Coverage ratio is used to find out the company’s ability to pay interest on outstanding debt. Also called the interest earned times ratio, this ratio is used by potential creditors and lenders to evaluate the risk of lending capital to a company. A higher coverage ratio is better, although the ideal ratio may vary by industry. When a company’s interest coverage ratio is only 1.5 times or less, its ability to meet interest expenses may be in doubt.
The “asset coverage ratio” is a financial measure that measures the extent to which a company can pay off its debts by selling or liquidating its assets. The higher the asset coverage ratio, the more times a company can cover its debts. Therefore, a company with a high asset coverage ratio is considered less risky than a company with a low asset coverage ratio. BDCs are required to maintain a minimum asset coverage of 150% which provides strong protection for bondholders, which is one of the reasons why no publicly traded BDC has filed for bankruptcy or defaulted on bondholders in the history of the sector.
The following table shows Historical Coverage ratios for MAIN:
Major investment grade bonds/bonds
I like BDC bonds in part because of their quality and relatively short-term maturities, which offer low price volatility during market drawdowns, and outperform other high-yielding assets during market selloffs. Most BDC bonds mature over the next three to five years, which is excellent for investors given the current inverted yield curve (short-term interest rates are higher than long-term interest rates).
I prefer bonds/securities (with CUSIPS) to baby bonds (with indexes), which mostly relate to “full premiums,” which compensate bondholders for the interest they would have received if their bonds had not been called, or redeemed by the issuer before The maturity date to ensure that bondholders receive fair compensation for the loss of the bond’s future coupon payments. BDC bonds are attractive for many reasons including having higher yields/yields than other investment grade bonds as well as the capital protection provided by the unique structure of BDC. Also, because of my focus on the risk and quality of BDC’s common stock, I have an intimate understanding of the risk and quality for bondholders. Below are some of the options available to management teams before a potential default on a debt obligation:
- Reduce leverage by not reinvesting premiums from portfolio companies
- Reducing dividends to common shareholders
- – Reducing or waiving administrative fees and incentives
- BDCs have permanent capital (there is no “run to the banks” to force them to liquidate undervalued assets).
- Capital increase: regular or preferred, and even diluted if necessary
- An external manager/credit platform can provide additional capital if necessary
For these reasons, no BDC has defaulted on its debt obligations.
As shown below, the Yield to Maturity (“YTM”) of the 20026 MAIN Bonds has decreased It recently rose to about 7.5%.:
This article discussed MAIN which is a safer BDC with a current yield of 8.3% for its common stock and 7.5% for its bonds due in 2026. Both should be considered for a balanced portfolio.
Stock market volatility is likely to remain high, and BDC bonds allow investors to earn annual returns of 6% to 9% with maturities ranging from one to eight years. Please note that securing a safer return is attractive, especially given the potential “reinvestment risk” of investing in Treasuries/money market funds (if rates eventually decline).
As previously mentioned, I will have a series of articles discussing how to build a balanced retirement portfolio using BDC stocks and their safer bonds/securities. The following table shows some examples of allocations and my personal portfolio (again, not exactly) with portfolio returns ranging from 5.2% to 9.4%.
Many other BDCs have tradable securities, junior bonds and preferences including ARCC, BXSL, CCAP, CSWC, FDUS, FSK, GAIN, GBDC, GECC, GLAD, GSBD, HRZN, HTGC, NMFC, MFIC, OBDC, OCSL, OFS, OXSQ, PFLT, PNNT, PSEC, RWAY, SAR, SSSS, TCPC and TRIN And TSLX and WHF. Many of these companies have recently issued new bonds/securities that offer much higher actual returns More than 7% to 8% annual cash dividends (paid quarterly) This is much higher than the previous actual returns of 5% to 6%. Both of these links were recently added to BDC Google Sheets.
Editor’s Note: This article discusses one or more small-cap stocks. Please be aware of the risks associated with these stocks.