BlackRock Capital: 11.7% return and 25% discount to book value (NASDAQ: BKCC)

Khanchit Khirisutchalual

For high yield investments, there is a clear downside buying opportunity, and BlackRock Capital Investment Corporation (NASDAQ: BKCC) is a business development company that investors can consider buying.

BDC is well managed, but its share price has recently fell significantly, despite the portfolio shifting to higher quality First Liens.

The stock is now trading at an unjustified 25% discount to net asset value, and the relative strength index indicates that it is oversold.

Time to buy the sale: BKCC Trading at a deep discount

Many business development firms are seeing declining net asset value multiples due to the recent market and BDC industry downturn.

BDC shares are now trading at a 25% discount to their net asset value. The net asset value of BlackRock Capital Investment has increased significantly in recent days, and the RSI value of 20.25 indicates that the stock is now oversold.

RSI value of BKCC stock

RSI value (Stockcharts.com)

BlackRock Capital Investment has already sold at a discount to NAV before the recent pullback, but I think that makes BDC more attractive in terms of income and yield.

BlackRock share price at book value
Data by Y-Charts

Investors can now enjoy a high dividend safety margin at a 25% discount to net asset value, thanks to the business development company’s successful investment portfolio.

BlackRock Capital Investment provides investment capital to middle market companies and has focused on senior loans which are highly secured and therefore have a very low probability of default.

BlackRock Capital Investment’s debt portfolio had the following investment breakdown: 74% of the funds were invested in the highest quality debt (First Liens), 20% in Second Lien debt (also secured) and 6% in various forms of unsecured debt. and equity (both ordinary and preferred).

The portfolio itself consisted of 100 portfolio companies, with a total investment value of $557 based on fair value.

BKCC Wallet Status

Wallet Status (BlackRock Capital Investment Corp.)

BlackRock Capital Investment has shifted its portfolio focus and focus on investing in high-quality First Liens over the past four years, resulting in a more stable portfolio and reduced downside risk for business development company.

I particularly like the focus on First Lien because recession risks increase and BDCs with lower portfolio risk can outperform other business development firms that are more equity focused. .

BlackRock Capital Shift in Portfolio Orientation

Change in portfolio focus (BlackRock Capital Investment Corp.)

The dividend is not covered by the net investment income

The dividend is currently not covered by net investment income. The payout ratio was around 100% in the last quarter, but 118% in the previous twelve months, indicating that the business development company is not currently receiving its dividend.

Dividend and payout ratio

Dividend and payout ratio (Table created by author using trust information)

Since BlackRock Capital Investment does not hedge its dividend, the market can expect a lower dividend in the near future. Given that BKCC is already trading at a steep discount to NAV, I believe the possibility of a lower dividend is already reflected in BDC’s valuation.

Why BlackRock Capital Investment could see a higher valuation

Markets have been quite volatile in recent weeks, but there is no reason why valuations should not recover, particularly if economic growth picks up and inflation is brought under control.

That said, given the risks outlined here, I think the risk/reward trade-off isn’t too bad, given that BlackRock Capital Investment shares are available at such a high discount to NAV.

My conclusion

Fear has returned to the market, and long-term income investors who want to buy a BDC at a decent price should consider BlackRock Capital Investment, but only as a higher-risk BDC alternative due to its high payout ratio.

I think the business development company has a stronger portfolio than in the past, thanks to its focus on early ties, which protects against downturns in the US economy.

The unreasonable 25% net asset value discount is BKCC’s main selling point. To buy.

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