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1、North America Equity Research29 October 2019J. P MorganBusiness Development Companies3Q19 PreviewSpecialty & Consumer Finance Richard Shane AC (1-415)315-6701 HYPERLINK mailto:richard.b.shanejpmorgan richard.b.shanejpmorgan Bloomberg JPMA SHANE J.P. Morgan Securities LLCSpecialty & Consumer Finance

2、Richard Shane AC (1-415)315-6701 HYPERLINK mailto:richard.b.shanejpmorgan richard.b.shanejpmorgan Bloomberg JPMA SHANE J.P. Morgan Securities LLCWe are previewing the BDCs for 3Q19. We expect modest NAV compression when 3Q19 results are announced, driven by a combination of divergent spreads (narrow

3、ing for higher-rated loans vs. widening for lower-rated loans) and lower interest rate expectations.Lower rate expectations continue to drive investor outflows in 3QX9. Continued investor outflows from leveraged loans pressured yields in 3Q19, particularly for lower-rated loans. Prime fund outflows

4、in the September quarter totaled $8.8B, bringing YTD outflows through 9/30/19 to $29.9B.Spreads diverge based on credit quality. All-in institutional spreads on relatively higher quality BB/BB- loans compressed 63 bps during 3Q19 to L+261, while spreads on lower-rated B/B- loans widened 51bps to L+4

5、76 in September from L+424 in June. The divergence in spreads led to a 3Q19 loss of 0.4% for the JPM 1st Lien Leveraged Loan Index, compared to a 2.1% loss for the JPM 2nd Lien Leveraged Loan Index.Expect modest NAV compression, though accretive share repurchases may provide NAV support. We estimate

6、 NAVs will generally contract modestly in 3Q19. We expect that BDCs with elevated second lien and/or energy exposure will compress more than those with primarily first lien exposure. Additionally, those BDCs with active share repurchase plans in effect will likely experience modestly less NAV compre

7、ssion, as accretive share repurchases will provide some ballast to NAV (AINV, BKCC, CGBD, and FSK).Ratings & PT changes:o Downgrade driven by elevated exposure to energy and 2nd lien:PNNT: Downgrade to UW (from N), PT to $6 (from $6.50)o PT changes:AINV: Remain N; PT to $15.50 (from $16)BKCC: Remain

8、 UW; PT to $5 (from $5.50)TSLX: Remain OW; PT to $22 (from $21)Equity Ratings and Price TargetsCompanyTickerMkt Cap($ mn)Price ($)Rai ngCurPrice Ta getCurPrevEndDatePrevEndDateApollo InvestmentAINV US1,086.1615.99Nn/c15.50Dec-2016.00n/cAres CapitalARCC US7,881.5418.47OWn/c19.50Dec-20n/cn/cBlackRock

9、Capital Investment CorpBKCC US323.534.70UWn/c5.00Dec-205.50n/cFS KKR Capital CorpFSK US2,996.755.76OWn/c6.50Dec-20n/cn/cOaktree Specialty Lending CorpOCSLUS728.775.17OWn/c6.00Dec-20n/cn/cPennantPark InvestmentPNNT US417.026.22UWN6.00Dec-206.50n/cSolar CapitalSLRC US867.6120.53Nn/c21.50Dec-20n/cn/cTC

10、G BDCCGBD US860.0014.29OWn/c15.50Dec-20n/cn/cTPG Specialty LendingTSLX US1,401.9921.23OWn/c22.00Dec-2021.00n/cWhiteHorse FinanceWHFUS292.9914.26UWn/c14.00Dec-20n/cn/cSource: Company data, Bloomberg, J.P. Morgan estimates, n/c = no change. All prices as of 28 Oct 19.See page 33 for analyst certificat

11、ion and important 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

12、 a single factor in making their investment decision. HYPERLINK :/ jpmorganmarkets jpmorganmarkets OverweightShares O/S (mn)42752-week range ($)19.26-14.45Market cap ($ mn)7,881.54Exchange rate1.00Free float(%)99.5%3M - Avg daily vol (mn)1.593M - Avg daily val ($29.7mn)Volatility (90 Day)13IndexRUSS

13、ELL2000BBG BUYIHOLDISELL111410Company DataAres CapitalYear-end Dec ($)FY17AFY18AFY19E(Prev)FY19E(Curr)FY20E(Prev)FY20E(Curr)FY21E(Prev)FY21E(Curr)Investment income ($ mn)1,1601,3371,5161,5081,5881,5801,7151,706Net investment income ($597718800804788806815841mn)Adj. net income ($ mn)59771880080478880

14、6815841Adj. EPS ($)1.401.691.881.881.841.881.891.95BBG EPS ($)1.361.66-1.86-1.81-1.85NIM-NAVPS ($)16.6517.1217.3417.2617.5017.4617.6417.66DPS ($)1.521.541.681.681.681.681.761.76P/NAVPS1.01.0Debt/Equity68.4%71.4%84.9%83.9% 102.9% 101.5% 120.7% 118.6%Ares Capital Corporation (ARCC;AR

15、CC US)Source: Company data, Bloomberg, J.P. Morgan estimates.Investment Thesis, Valuation and RisksAres Capital Corporation (Overweight; Price Target: $19.50)Investment ThesisWe maintain our Overweight rating on ARCC. We believe the strength of ARCCs origination platform, sizable balance sheet, and

16、ample liquidity position the company favorably in a competitive investing environment. Particularly in the current tight spread environment, we believe ARCCs scale and industry relationships enable the BDC to continue to make competitive, high-credit-quality investments. We believe that it is execut

17、ing its asset rotation strategy well (e.g., SDLP), boosting portfolio yield. We also believe ARCC will attract meaningful interest from institutional investors should there be a favorable outcome on AFFE.ValuationWe maintain our Dec 2020 price target of $19.50. Our price target is based on a l.lOx m

18、ultiple on our YE2020 NAV estimate of $17.46. Our target multiple is essentially in line with ARCCs long-term historical average and reflects ARCCs position as an industry leader, as well as the increased earnings power of the portfolio, as demonstrated by elevated dividend coverage in 1H19. Our pri

19、ce target implies an annualized total return of 14.9%.Risks to Rating and Price TargetDownside risks. Ares Capital assumes substantial portfolio risk by investing in private, non-investment-grade companies. While the company seeks to mitigate this risk through diversification (across companies, indu

20、stries, geographies, and instruments) and investment selection, it remains subject to earnings volatility and capital losses. Also, substantially all of these investments are subject to legal and other restrictions on resale and are less liquid than publicly traded securities. If ARCC is required to

21、 liquidate its portfolio, the company may not be able to realize the carrying value of the securities. This could lead to reduced earnings or impairments of book value, potentially triggering dividend cuts and share price declines. As a BDC, ARCC is required to distribute at least 90% of taxable inc

22、ome to shareholders in the form of a dividend. We expect that ARCC will periodically issue new shares. Overhang from potential offerings may limit share price appreciation.Ares Capital: Summary of FinancialsIncome StatementFY17 FY18 FY19E FY20E Income StatementFY17 FY18 FY19E FY20E0 0 0 9 D 60060988

23、8 ,2911,58308(207548080434 d -1 /( zl17 8 b/ nu 9 4 7 V 18 7 8 18 ,1813,50271(17688807109424 ， / z- zl f !l17 7 V 4 8 9 習(xí) 8 6 6 9 14 4931019381155522605 R 324058742584412 ， 4 / / /- 16 0 9 D 706665072 576Z519I49236224559 J22C545 16441 ， / /l1,0411,1811,290Interest Income97137110D

24、ividend Income1,3371,5081,580Total Investment Income(240)(271)(308)Interest Expense(19)(17)(20)Tax(588)(688)(754)Total expense718804806Net Investment Income419770Net Realized Gain (Loss)(255)(109)0Net Unrealized Gain (Loss)858771806Net income426428430Shares O/S426427429Weighted Avg.Shares O/S1.691.8

25、81.88Operating EPS2.011.811.88GAAP EPS1.541.681.68DPS16 0 9 D 706665072576 當(dāng)代 W9236224559 J22O545 16441 / /l zlInterest IncomeDividend IncomeTotal Investment IncomeInterest ExpenseTaxTotal expenseNet Investment IncomeNet Realized Gain (Loss)Net Unrealized Gain (Loss)Net incomeShares O/SWeighted Avg.

26、Shares O/SOperating EPSGAAP EPSDPSRatio AnalysisFY17FY18FY19EFY20EEPS growth(12.5%)20.0%11.7%(0.2%)ROA5.5%5.7%6.0%5.4%ROE9.7%10.0%10.9%10.8%Debt to equity68.4%71.4%83.9%101.5%BVPS16.6517.1217.2617.46Dividend payout ratio97.0%76.5%93.0%89.4%Dividend Yield8.2%8.3%9.1%9.1%Ratio AnalysisFY17FY18FY19EFY2

27、0EEPS growth(12.5%)20.0%11.7%(0.2%)ROA5.5%5.7%6.0%5.4%ROE9.7%10.0%10.9%10.8%Debt to equity68.4%71.4%83.9%101.5%BVPS16.6517.1217.2617.46Dividend payout ratio97.0%76.5%93.0%89.4%Dividend Yield8.2%8.3%9.1%9.1%Balance sheetFY17FY18FY19EFY20EInvestments11,84112,41713,45515,005Cash and cash equivalents316

28、296300300Total assets12,34712,89514,03715,587Total Debt4,8545,2146,1967,618total Liabilities5,2495,5956,6538,082Shareholders equity7,0987,3007,3847,505Source: Company reports and J.P. Morgan estimates.BlackRock Capital Investment CorpUnderweightBlackRock Capital Investment Corp (BKCC;BKCC US)Source:

29、 Company data, Bloomberg, J.P. Morgan estimates.Company DataYear-end Dec ($)FY17AFY18AFY19E (Prev)FY19E(Curr)FY20E(Prev)FY20E(Curr)FY21E (Prev)FY21E(Curr)Shares O/S (mn)6952-week range ($)6.64-4.60Investment income ($ mn)97848277958310492Market cap ($ mn)323.53Net investment income ($554742424538494

30、3Exchange rate1.00mn)Free float(%)98.5%Adj. net income ($ mn)55474242453849433M - Avg daily vol (mn)0.37Adj. EPS ($)0.610.660.620.610.670.570.730.633M - Avg daily val ($1.9BBG EPS ($)0.690.66-0.62-0.64-0.73mn)NIM9.2%9.3%9.1%8.9%9.5%8.9%9.5%9.0%Volatility (90 Day)20NAVPS ($)7.837.076.836.806.956.816.

31、866.66IndexRUSSELLDPS ($)0.720.720.640.640.560.560.640.642000P/NAVPS0.70.7BBG BUYIHOLDISELLQUllDebt/Equity36.2%38.3%65.1%55.1%76.5%69.4%92.7%87.8%Investment Thesis, Valuation and RisksBlackRock Capital Investment Corp (Underweight; Price Target: $5.00)Investment ThesisMaintain Unde

32、rweight rating. Our Underweight outlook on BKCC reflects our view that sentiment is likely to remain negative until legacy assets can be exited and the trajectory of the portfolios earnings power can be restored. The management team that has been in place since the beginning of 2017 has made progres

33、s in reducing non-accruals and monetizing legacy investments, though there is work left to be done and the recent dividend cut to $0.14/sh (from $0.18) may continue to weigh on sentiment. We see better relative risk-adjusted returns elsewhere in the BDC universe.ValuationWe lower our Dec-2020 PT to

34、$5 (from $5.50). Our price target is based on a 0.7x multiple (down from 0.825x previously) of our YE2020 estimated NAV of $6.81. We lowered our multiple to reflect lower ROEs going forward and reflect sentiment around the stock. Our target multiple remains lower than the long-term average multiple

35、for the peer group of l.Ox to reflect the under-levered nature of the portfolio, legacy assets remaining to exit, and elevated equity position. Our price target equates to a potential annualized total return through YE2020 of 19.0%.Risks to Rating and Price TargetUpside risks. BKCC could outperform

36、our estimates if mgmt is able to rotate the nonperforming and equity positions into interest-earning investments faster than we project. Shares could also outperform if the earnings power of the portfolio ramps faster than we model, providing additional support for the quarterly dividend.BlackRock C

37、apital Investment Corp: Summary of FinancialsSource: Company reports and J.P. Morgan estimates.Income StatementFY18FY19EFY20EFY21ECash flow statement1Q19A2Q19A3Q19E4Q19EInterest Income66596471Interest Income14A15A1515Dividend Income15171719Dividend Income4A4A44Total Investment Income84778392Total In

38、vestment Income19A20A1919Interest Expense(15)(15)(16)(18)Interest Expense(3)A(4)A(4)(4)Tax0000Tax0A0A00Total expense(45)(40)(45)(49)Total expense(10)A(11)A(8)(11)Net Investment Income47423843Net Investment Income11A11A119Net Realized Gain (Loss)(46)(24)00Net Realized Gain (Loss)0A(24)A00Net Unrealiz

39、ed Gain (Loss)(9)500Net Unrealized Gain (Loss)7A2A(4)0Net income(9)233843Net income18A(11)A79Shares O/S69676768Shares O/S69A69A6867Weighted Avg.Shares O/S71686767Weighted Avg.Shares O/S69A69A6868Operating EPS0.660.610.570.63Operating EPS0.17A0.16A0.150.13GAAP EPS(0.13)0.340.570.63GAAP EPS0.26A(0.15)

40、A0.100.13DPS0.720.640.560.64DPS0.18A0.18A0.140.14Balance sheetFY18FY19EFY20EFY21ERatio AnalysisFY18FY19EFY20EFY21EInvestments672705775845EPS growth9.7%(7.9%)(7.4%)11.4%Cash and cash equivalents13202020ROA6.4%5.8%4.9%5.0%Total assets694741811881ROE9.0%8.9%8.3%9.4%Debt to equity38.3%55.1%69.4%87.8%Tot

41、al Debt186251318395BVPS7.076.806.816.66total Liabilities207285353432Dividend payout ratioNM189.5%98.8%101.3%Dividend Yield15.3%13.6%11.9%13.6%Shareholders equity487456458450FS KKR Capital CorpOverweightFS KKR Capital Corporation (FSK;FSK US)Company DataYear-end Dec ($)FY17AFY18AFY19EFY19EFY20EFY20EF

42、Y21EFY21EShares O/S (mn)520(Prev)(Curr)(Prev)(Curr)(Prev)(Curr)52-week range ($)6.75-5.09Investment income ($ mn)419394793793804804802802Market cap ($ mn)2,996.75Net investment income ($-Exchange rate1.00mn)Free float(%)99.5%Adj. net income ($ mn)2042053913903953993903983M - Avg daily vol (mn)2.00Ad

43、j. EPS ($)0.830.820.750.750.780.790.770.793M - Avg daily val ($11.6BBG EPS ($)0.810.97-0.75-0.84-0.76mn)NIM8.4%4.1%8.3%8.3%8.1%8.2%7.9%8.0%Volatility (90 Day)21NAVPS ($)9.307.847.917.907.947.937.957.96IndexRUSSELLDPS ($)0.860.850.760.760.760.760.760.762000P/NAVPS0.70.7BBG BUYIHOLDI

44、SELL10Debt/Equity75.0%81.4%86.4%87.0%90.8%91.0%95.5%95.4%Source: Company data, Bloomberg, J.P. Morgan estimates.Investment Thesis, Valuation and RisksFS KKR Capital Corporation (Overweight; Price Target: $6.50)Investment ThesisMaintain our OW rating. After its combination with CCT in December 2018,

45、FSK is one of the largest publicly traded BDCs. We believe FSK has made substantial progress on the integration with the KKR private credit platform. As a result of the combination of portfolios, FSK has become more diverse and has reduced its exposure to energy-related investments and equity positi

46、ons, which have been a drag on valuation at times. Historically, FSK has tended to trade close to NAV. However, shares cun-ently trade at a discount to 2Q19 NAV (0.73x), as a result of historical concentration and noise around the portfolio combination and the potential for additional marks. Our OW

47、rating reflects our belief that fundamental performance has stabilized, which when combined with an increase in leverage (per shareholder approval and the SBCAA) and a share repurchase authorization should serve as a catalyst for a rebound in sentiment.ValuationWe reiterate our Dec 2020 price target

48、 of $6.50, which implies an annualized total return of 26.2%. Our price target is based on a 0.8x multiple of our YE2020 NAV estimate of $7.93. Our target multiple is lower than the long-term peer average multiple of 1.00 x to reflect the late stage of the credit cycle and intense competitive enviro

49、nment.Risks to Rating and Price TargetDownside risks. FSK assumes substantial portfolio risk by investing in private, noninvestment-grade companies. While the company seeks to mitigate this risk through diversification and investment selection, it remains subject to earnings volatility and capital l

50、osses. Also, substantially all of these investments are subject to legal and other restrictions on resale and are less liquid than publicly traded securities. If FSK is required to liquidate its portfolio, the company may not be able to realize the carrying value of the securities. This could lead t

51、o reduced earnings or impairments of book value, potentially triggering dividend cuts and share price declines. As a RIC/BDC, FSK is required to fully distribute income through dividends, severely limiting its ability to retain capital. Finally, FSK relies on leverage to enhance returns. Reduced acc

52、ess to leverage or increases in borrowing costs could materially impact FSKs performance.FS KKR Capital Corp: Summary of FinancialsSource: Company reports and J.P. Morgan estimates.Income StatementFY18FY19EFY20EFY21ECash flow statement1Q19A2Q19A3Q19E4Q19EInterest Income372708742740Interest Income174

53、 A168A181185Dividend Income9462020Dividend Income10A23A85Total Investment Income394793804802Total Investment Income195A199A199200Interest Expense(84)(175)(174)(170)Interest Expense(43)A(41)A(45)(46)Tax000Tax0A0A00Total expense-Total expense-Net Investment Income-Net Investment Income-Net Realized Ga

54、in (Loss)(119)(82)00Net Realized Gain (Loss)A(67)A00Net Unrealized Gain (Loss)4837800Net Unrealized Gain (Loss)21A67A(10)0Net income569386399398Net income101A101A8797Shares O/S531504504504Shares O/S524A520A512504Weighted Avg.Shares O/S251518504504Weighted Avg.Shares O/S528A522A516508Operating EPS0.8

55、20.750.790.79Operating EPS0.18A0.19A0.190.19GAAP EPS2.260.750.790.79GAAP EPS0.19A0.19A0.170.19DPS0.850.760.760.76DPS0.19A0.19A0.190.19Balance sheetFY18FY19EFY20EFY2隹Ratio AnalysisFY18FY19EFY20EFY21EInvestments7,3877,3837,5767,780EPS growth(1.8%)(7.7%)5.2%(0.2%)Cash and cash equivalents104100100100RO

56、A3.5%5.1%5.2%5.0%Total assets7,7057,6567,8498,053ROE6.4%9.6%10.0%9.9%Debt to equity81.4%87.0%91.0%95.4%Total Debt3,3913,4663,6413,830BVPS7.847.907.937.96total Liabilities3,5393,6713,8484,037Dividend payout ratio37.6%102.0%96.0%96.2%Dividend Yield14.8%13.2%13.2%13.2%Shareholders equity4,1663,9854,001

57、4,016Oaktree Specialty Lending CorpOverweightOaktree Specialty Lending Corp (OCSL;OCSL US)Source: Company data, Bloomberg, J.P. Morgan estimates.Companv DataYear-end Sep ($)FY17AFY18AFY19E (Prev)FY19E(Curr)FY20EFY21E (Prev)FY21E(Curr)Shares O/S (mn)14152-week range ($)5.75-4.08Investment income ($ m

58、n)-Market cap ($ mn)728.77Net investment income ($-Exchange rate1.00mn)Free float(%)88.3%Adj. net income ($ mn)735967677476773M - Avg daily vol (mn)0.32Adj. EPS ($)0.510.420.480.480.530.540.553M - Avg daily val ($1.7BBG EPS ($)0.560.41-0.590.50-0.53mn)NIM-Volatility (90 Day)15NAVPS ($)6.166.096.626.

59、596.666.756.73IndexRUSSELLDPS ($)0.470.280.380.380.460.480.482000P/NAVPS0.8BBG BUYIHOLDISELL50Debt/Equity77.8%74.3%55.2%54.3%56.6%59.9%59.0%Investment Thesis, Valuation and RisksOaktree Specialty Lending Corp (Overweight; Price Target: $6.00)Investment ThesisWe maintain our Overwei

60、ght rating. Oaktree Capital is an experienced alternative asset manager with the deep bench of investment expertise in fixed income and distressed debt, which gives us confidence that the mgmt. team at OCSL will be able to continue to narrow the discount to NAV and improve fundamental performance. A