Originations and valuations are the most critical factors right now to selecting a BDC as an investment option as there is more differentiation between companies that are able to capitalize on any dislocation and those that are stuck in the transitional period, says Mike Turner, a Senior Vice President and Research Analyst at Compass Point Research & Trading, LLC.
“For the industry as a whole, credit quality is something that we watch, and arguably, I don’t believe we have hit the trough quite yet. Strong credit quality is typically a reflection of a healthy economy, which should then translate into origination growth,” he said.
Turner likes MCG Capital Corporation (MCGC) although the company is going through a transitional period as it recovers from some sour investments during the past few years in the capital structure. He says MCGC, going forward, is aiming to recycle out of some of those poor-performing investments and reinvest in senior debt positions.
“It’s really a transitional story where they’ve shrunk their balance sheet and right-sized their cost structure. They’re cleaning it up and getting earnings and the dividend to a stabilized level. The process isn’t complete, but in the low $4 range, the stock seems to price in a worst-case scenario,” Turner said. “So at that price, you’re getting a nice dividend yield to wait and the downside protection of buying it at a big discount to NAV.”
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