How to Analyze a BDC

A BDC is a lender, so judging one is a lot like judging a bank: is it earning enough to pay its dividend, are its borrowers paying, and is the value behind each share holding up? Five numbers, all printed in every quarterly report, answer most of that.

1. Dividend coverage from net investment income

Net investment income (NII) is the interest, fees and dividends a BDC earns from its portfolio, minus its interest costs, fees and expenses. It’s the income its regular dividend is supposed to come from.

Above 100% means the dividend is earned, with extra left over. Consistently below 100% means it’s being paid partly from somewhere else, such as past earnings or capital, and a cut becomes more likely. Look at four or more quarters, not one.

2. NAV per share, over years

Net asset value per share is what the BDC’s loans and investments are worth, minus its debt, divided by its shares. Because BDCs pay out almost everything, NAV can’t grow much, but in a well run BDC it should hold steady or creep up over time. A NAV that falls year after year means losses or poor decisions are eating the shareholders’ capital. That’s the single most important long-term number.

3. Non-accruals

When a borrower stops paying, the BDC puts the loan on non-accrual and stops counting its interest as income. Reports show non-accruals as a share of the portfolio at cost and at fair value. Under about 2% is generally healthy; a rising trend, or anything above roughly 4% to 5%, deserves attention.

4. What it owns

5. Leverage and valuation

Most BDCs run debt to equity between about 0.9× and 1.25×. Higher leverage means more income in good times and more risk in bad ones. Finally, compare the share price with NAV. Quality BDCs often trade at or above NAV; troubled ones trade at discounts. A discount can be a bargain, but it’s often the market’s way of saying it doesn’t trust the reported NAV.

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