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Eyeballing AINV and PSEC

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By TMFGunsightpass
November 18, 2009

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In this post earnings season lull, I thought I might try and stir up some discussion about BDCs. First a disclaimer: I am by no means a BDC expert. That being said I have paid attention to PSEC for some time and AINV more recently so I thought I would compare the two.

Background:

Apollo Investment Corporation (AINV) is a BDC [Business Development Company] that is connected to the Apollo Group platform run by Leon Black. AINV was started in 1990 and went public in 2004. AINV's CEO is James Zelter whose background includes a stint at Citigroup

Prospect Capital Corporation (PSEC) is a BDC that also started in 1990 and went public in 2004. PSEC's CEO is John Barry who has been with PSEC since 1990 and previously worked at Rothschild & Company in Private Equity and for Merrill Lynch. He is a lawyer by training.

NAV:

AINV currently trades at 7% discount to its $10.29 NAV while PSEC trades at a 4% discount to its $11.11 NAV.

AINV's NAV suffered greatly during the financial crisis. After peaking in the quarter ending June 2007 at $19.09, NAV fell 49% to $9.82 by the end of the March 2009 quarter. However, AINV's NAV has risen during the past 2 quarters to $10.29, a five percent increase from the bottom. PSEC's NAV also suffered, but to a lesser degree; peaking at $15.08 in Sept 2008 and hitting $11.11 in the most recent quarter. PSEC's continued NAV decline is in large part due to the dilution of multiple equity raises.

Additional note: AINV's non-accrual investments only represent 1% of the fair value of their portfolio while PSEC's represent 5.7% of their fair value

Edge: Slight edge to AINV based on the contribution of non-accrual investments to fair value and the propensity for PSEC management to dilute shareholders

Dividend:

AINV currently yields 12.2% and is more than covering its dividend through net investment income. AINV earned $.34 in investment income last quarter and is paying out $.28. PSEC yields 16.3% but is not currently covering the dividend. In the most recent quarter, PSEC earned $.25 but paid out $.4075. PSEC's investment income guidance for next quarter is in the range of $.22 -$.30. However, its Patriot acquisition will add $.09 to its run rate. Based on current information, it would seem PSEC will be paying out more than it is currently earning in investment income. AINV does not provide guidance but looks to have a slight cushion.

Historically, it is important to note that PSEC has raised its quarterly dividend 20 quarters in a row while AINV had to cut theirs in half earlier this year.

Edge: Even though I favor the more conservative actions of AINV's management I will rate this a draw as even if PSEC has to cut its dividend 15% to match its near term run rate post-Patriot it will yield over 12%.

Liquidity:

AINV tends to operate with more leverage than PSEC which created issues earlier in the year as it approached some important limits but it currently has $800 million in available capital compared to PSEC which currently has about $180 available. AINV has reduced its debt-to-equity to .54 which is on the lower side of its .5 to .7 target.

Edge: AINV

Portfolio Risk:

AINV has investments in 71 companies, 6 investments on non-accrual and invests in mid-market companies while PSEC has investments in 29 companies with 5 on non-accrual. PSEC's acquisition of Patriot will increased the number of companies to 61 and the company has moved away from its energy focus.

Edge: Slight edge to AINV

Outlook:

Both companies were fairly positive about the future indicating that business has recently picked up. PSEC management shared that it has over $4 billion in the pipeline of deals that it is considering.

Edge: Draw

Misc.

PSEC management seems to be more aggressive than AINV's, going to the market 5 separate times during 2009. It is also important to note that PSECs has been unable to monetize one of its most successful ventures, Gas Solutions, and its valuable hedges start to run out in the second quarter of 2010.

Overall, I tend to prefer AINV at this time as I cannot get comfortable with PSEC's management actions.

Any thoughts on these or other BDCs?

Regards,
Greg