J.P. 摩根-美股-消费者金融行业-商业开发公司：行业入门-2019.4.29-62页.pdf

North America Equity Research29 April 2019 Business Development CompaniesBDCs:An Industry PrimerSpecialty&Consumer FinanceRichard Shane AC(1-415)315-Bloomberg JPMA SHANE J.P.Morgan Securities LLCMelissa Wedel,CFA(1-415)315-J.P.Morgan Securities LLCCharles Arestia(1-415)315-J.P.Morgan Securities LLCHarshav Raj(91-22)6157-J.P.Morgan India Private LimitedSee page 59 for analyst certification and important disclosures,including non-US analyst disclosures.J.P.Morgan does and seeks to do business with companies covered in its research reports.As a result,investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.Investors should consider this report as only a single factor in making their investment This report is a primer and overview of the business development company(“BDC”)vertical.Specifically,the report includes:An overview of BDCs as investment vehicles,the nature of the underlying investments in BDC portfolios,the pass-through nature of BDC vehicles,and requirements to qualify as a BDC A review of the leveraged loan market,including issuance trends,spread trends,and historical default rate trends A review of the middle market segment,including size and issuance Discussion of the AFFE ruling,how that impacted demand for BDC shares from institutional investors,and why that may change in the near term A summary of current P/NAV valuation multiples and a comparison of those multiples relative to history for the BDCs in our coverage universe Portfolio details and company information about the BDCs in our coverage universe2North America Equity Research29 April 2019Richard Shane(1-415)315- Table of ContentsIndustry Overview.3Leveraged Loan Landscape.4A Potential Resolution on AFFE.9Relative Valuation.10Apollo Investment Corporation.12Ares Capital.17BlackRock Capital Investment Corporation.22TCG BDC.26FS KKR Capital Corp.31Oaktree Specialty Lending Corp.36PennantPark.41Solar Capital.45TPG Specialty Lending.50WhiteHorse Finance.543North America Equity Research29 April 2019Richard Shane(1-415)315- Industry OverviewBusiness development companies(BDCs)are a type of publicly registered specialty lending company that was established by Congress in 1980 as an amendment to the Investment Company Act of 1940.BDCs were formed primarily to facilitate the flow investment capital to private middle market businesses(EBITDA$20M-$250M)an important segment that drives U.S.GDP and employmentby reducing the burdens and limitations imposed on traditional investment partnerships.Size of the BDC MarketThere are roughly46 public BDCs and a multitude of private BDCs,which provide funding through a variety of loan types,including senior secured,senior unsecured,mezzanine and subordinated loans with some flexibility in terms.BDC assets have grown from$1B in 2005 to$18B at the end of 2018.Figure 1:BDC asset growth over time$in billionsSource:BloombergBDCs target middle market companies with higher leverage than would typically be funded by traditional banks.Accordingly,BDCs typically charge higher fees and interest rates to account for less liquidity and higher default risk.These middle market loans are typically floating rate in nature with 3-4 year maturities.BDCs are best suited for investors seeking current income with equity-like risk tolerance.Prior to the financial crisis,BDCs allocated as much as 30%capital to direct equity investments.The severity of the crisis revealed the risks of the strategy and now BDCs generally have equity exposures of 0-10%of investment assets.Because long term performance is tied to investment selection and underwriting,manager selection is an important criteria.US GAAP requires BDCs to mark the portfolio to fair value on a quarterly basis.The valuation process of BDC investments can be subjective,as BDC investment portfolios are largely comprised of Level 3 assets for which there market quotes are not available.BDC management companies typically engage third party valuation firms to value the individual portfolio investments,which ultimately drives quarterly fluctuations in NAV.$1$3$7$9$9$9$13$12$11$12$15$16$17$18$0$2$4$6$8$10$12$14$16$18$20200520062007200820092010201120122013201420152016201720184North America Equity Research29 April 2019Richard Shane(1-415)315- To maintain BDC status,a company must meet the following requirements,Including:Invest in at least 70%qualifying assets-generally private companies,controlled investments or government securities;Limit asset coverage ratio to 150%of assets to equity(effectively 2.0 x D:E)following the passage of Small Business Credit Availability Act(SBCAA)in March 2018;Make available“significant managerial assistance”to portfolio companies.BDCs are generally structured as Registered Investment companies(RICs)for corporate tax exemption to the extent income and investment gains are distributed to shareholders.To qualify for RIC under subchapter M of the Internal Revenue Code,a company must:Maintain BDC statusDistribute at least 90%of investment company taxable incomeGenerate at least 90%of gross income from qualified sources(dividends,interest,payment on securities,and gains on securities);Meet portfolio diversification requirements:a.At least 50%of assets must be in cash,US government securities,securities of other RICs,or other securities representing less than 5%of assets and less than 10%of the outstanding voting securities of the issuer;b.No more than 25%of assets in a single issuer(other than US government securities)or 2 or more controlled investments in the same or similar businessesLeveraged Loan LandscapeSize of the leveraged loan marketThe broad lending market over the past 20 years provides useful context for evaluating the current environment and the relative importance of middle market companies in the leveraged loan market.Total leveraged loan issuance pre-crisis peaked at$535B in 2007.Issuance volume dropped markedly the following year to$157B in 2008 before reaching$77B trough issuance in 2009.Leveraged loan issuance rebounded strongly over the course of the following four years,reaching a new peak of$607B in 2013 and reflecting a 68%CAGR over the four-year period.Leveraged loan issuance moderated from that peak through 2016,though issuance levels remained elevated as the post-crisis recovery persisted and investors chased yield in an accommodative Fed policy environment.2017 was the strongest year for issuance post-crisis at$645B,followed by$618B of leverage loan issuance in 2018.5North America Equity Research29 April 2019Richard Shane(1-415)315- Figure 2:Middle market share of total leveraged loans has decreased sharply over last 20 years$in billionsSource:S&P GlobalMiddle Market Capital Provider TrendsSince 1998,the leveraged loan market has been dominated by loans to larger companies,with middle market issuance peaking in 2000 at 19%of total leveraged loan issuance.The share of middle market loans has declined since 2009,falling to only 2%of leveraged loan issuance in 2018.On an absolute basis,total middle market issuance peaked at$41B in 1999 prior to the dot-com bust,then dropped precipitously during the 2000-2003 recession.As lending demand recovered in subsequent years,middle market issuance climbed to$35B in 2005,but ultimately fell 85%to$5B in 2009.Subsequent to the financial crisis,demand once again recovered and annual middle market issuance volumes have range from$9B-$15B since 2010.Figure 3:Middle market issuance$in billionsSource:S&P GlobalBDCs and alternative lenders continue to benefit from a multi-year tailwind of banks reducing their share in the middle market lending space.$256$243$185$139$139$166$265$295$480$535$157$77$236$377$466$607$529$421$478$645$61815%19%12%2%0%2%4%6%8%10%12%14%16%18%20%$0$100$200$300$400$500$600$700Leveraged loan issuanceMiddle market share(%)$39$41$35$12$17$13$26$35$34$29$8$5$11$14$10$13$15$10$9$14$11$0$10$20$30$40$501998199920002001200220032004200520062007200820092010201120122013201420152016201720186North America Equity Research29 April 2019Richard Shane(1-415)315- Figure 4:Tailwinds persist as banks reduce their share of middle market lendingSource:S&P GlobalDuring the last five years,new issue activity in the middle market space has been primarily driven by LBO activity,followed by refinancing,M&A,and then dividend/recap.Figure 5:New issuance activity remains driven by buyouts in last 5 yearsSource:S&P GlobalCovenant Lite TrendsCovenant-lite(“cov-lite”)loans are those that are issued with fewer restrictions for the borrower or fewer protections for the lender.The share of cov-lite loans has ramped up from 45%in 2014 to 60%of total leveraged loan issuance in 2018.2018 cov-lite issuance just fell short of 2017 record level at$370B(vs.$375B in 2017).16%7%15%26%16%20%12%9%4%7%6%4%4%17%13%39%35%21%23%21%13%12%16%20%1%1%6%7%16%6%13%10%10%8%9%11%13%5%4%58%67%29%30%49%46%57%68%74%64%59%89%90%4%6%1%3%2%3%0%3%1%2%1%1%1%2006200720082009201020112012201320142015201620172018Domestic BanksFinance Co.Foreign BanksInstitutional InvestorsSecurities Firms41%59%38%53%56%20%17%15%24%16%11%8%15%2%13%18%12%25%13%9%11%4%7%8%6%20142015201620172018LBORefinancingDividend/RecapAcquisitionOther7North America Equity Research29 April 2019Richard Shane(1-415)315- Figure 6:Cov-lite issuance remains strong in 2018$in billionsSource:S&P GlobalSpreads and Fund FlowsLeveraged loan funds experienced outflows for approximately two and a half years from 2014 through 1H16.However,the outflow trend reversed course in 2H16,as investors increasingly expected higher interest rates and as defaults remained low.2H16 saw a reversal with$17B of inflows followed by$14B in 2017 despite some outflows seen in 4Q17 Retail fund outflows turned negative in 4Q18 after being positive for three consecutive quarters in 2018 as investors shied away on credit concerns and lowered expectations for future rate increases,based on Fed Chair Powells comments indicating a slowdown in rate hikes in 2019.As most of the loans are tied to floating rates,reduction in hikes makes them less attractive to investors.Figure 7:Leveraged Loan Fund FlowsSource:S&P GlobalAll leveraged loan indices traded lower in 4Q18 due to widening of spreads.The J.P.Morgan Leveraged Loan index fell 4.5%and the J.P.Morgan Second Lien Leveraged Loan index and the S&P LSTA Leveraged Loan Total Return index each declined 3.5%.Spreads mostly trended flat from 2013 to late 2014 when they widened towards the end of the year.2015 witnessed a decline in spreads which reached a local trough in June 2015 after which they started widening again.Since 1Q16,increased investor demand for leveraged loans led to incrementally favorable terms for borrowers and$24$97$3$3$8$57$91$262$238$178$245$375$370$0$100$200$300$4002006200720082009201020112012201320142015201620172018-$40B-$20B$0B$20B$40B$60B$80B$100B200120022003200420052006200720082009201020112012201320142015201620171Q172Q173Q174Q171Q182Q183Q184Q181Q19Prime fund flows remained negative in 1Q19 and totaled$34.0B in 4Q18 and 1Q19 combined.8North America Equity Research29 April 2019Richard Shane(1-415)315- the environment was broadly been of spread compression with spreads on higher rated BB loans hitting multi-year lows of 207.6 in May 2018,though there were bouts of widening in between.Spreads widened in 4Q18 and were concentrated in December amidst heightened broader market volatility.Spreads on B-rated securities widened 191bps M/M to L+579 bps.(Data for BB/BB-securities were not available for December as there was no issuance in that rating during the month).Figure 8:All-in Institutional SpreadsSource:S&P GlobalLeveraged Loan DefaultsDefault rates started decreasing post crisis since Jan 2010 ending the year at 1.20%vs.8.58%at the start of the year.Defaults continued to remain low in the recovery period trending mostly below the long-term average of 3.20%.More recently,Default activity in Feb 2019 touched an 11-month high with default volumes totaling$5.3B across loans and bonds.However,the roll-off of iHeart($16B)in Feb 2019,from the 12-month calculation as it filed for bankruptcy resulted in a decrease in default rates in both Feb and March 2019.For loans,par-weighted default rates touched multi year lows and declined 2 bps M/M and 152bps Y/Y to 1.00%in March.We note that the combined default rate for loans and bonds remains at 0.97%as of March 2019,well-below the 20 year average of 3.2%and lowest since April 2014.However,we remain skeptical as we are late in the credit cycle and investors are wary of a turn in credit.We believe underwriting standards are critically important at this stage of the cycle and we believe excessive leverage in deals and excessively borrower-friendly terms could impact defaults in late 2020 and 2021.Figure 9:Default rates remain well-below historical averagesSource:JP Morgan High Yield Credit team285.9438.4200300400500600700800900Nov-12May-13Nov-13May-14Nov-14May-15Nov-15May-16Nov-16May-17Nov-17May-18Nov-18BB/BB-B+/B0%2%4%6%8%10%12%14%Dec-98Dec-00Dec-02Dec-04Dec-06Dec-08Dec-10Dec-12Dec-14Dec-16Dec-18Leveraged Credit-Par weighted default rateex-TXUPeaked in Nov 09:12.1%March 2019:0.97%17-yr Average:3.2%Spreads recovered in 1Q19 after blowing out during mid-December volatility.9North America Equity Research29 April 2019Richard Shane(1-415)315- A Potential Resolution on AFFEThe SEC in 2006 made certain amendments to Form N-1A under the Investment Company Act of 1940 that mandated open ended investment companies that invest in another company to include in their prospectus fee table,a line item called Acquired Fund Fee and Expenses(AFFE).BDCs are subject to the Company Act of 1940,and,therefore,investment companies like mutual funds and ETFs investing in BDCs are required to aggregate on a pro-rata basis,total annual fund operating expenses of securities issued by the BDCs.As a result,the expense ratios of institutional shareholders,funds,ETFs investing in BDCs are optically inflated.In response to this unfavorable treatment of BDCs,index providers removed BDCs from indices,causing a substantial decline in institutional ownership.On Feb 24th,2014,S&P removed BDCs from the S&P US indices.This was followed by MSCIs announcement on June 2nd and Russells announcement in late June 2014.All the events were followed by major sell-offs by fund managers,with Russells removal causing the largest sell-off.Average bid-ask spreads were higher throughout 1H14 due to the panic created by these announcements(Figure 10).Industry research estimates that in total,this led to a reduction in institutional ownership of BDCs by 13%from 2012 to 2014.During the same period,46%of institutional investors in Figure 10:Average bid-ask spreads remained were higher in 1H14Source:BloombergWe believe that inclusion of these expenses in the expense ratios of investing companies essentially leads to double counting of their management fee and expenses.When an acquiring fund invests in BDCs,the price already