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Solar Capital Ltd. Message Board

  • jackmaster20 jackmaster20 Dec 13, 2012 6:45 PM Flag

    NII components

    Do normally reported quarterly NII results include fees from early buy-outs ?

    I know PIK is included in NII but is it included in NOI ?

    How are the costs of capital, for each source of income, netted against income to
    arrive at NII and/or NOI. At market cost or cost at origination or by some other
    means ?

    Thanks for any explanations

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    • PIK is included in revenue, period. The various accounting schemes don't relate to that and don't change that. Cost of capital is not particularized for each investment. Cost of capital is aggregated on the expense side of the quarterly statement. A dollar is a dollar. On the balance sheet, assets are relatively valued given all the factors you know. On the cost side, debt is not valued. It is debt which has to be paid back at par. During the credit crisis, this killed some BDCs, as their assets were marked down, but debt was not. Killed BV. But, in many cases, the cash flow from the assets was solid and it gave a very distorted picture. Hence, the opportunity for the investor.

      From a cash flow perspective, many BDCs were better values than it appears.

      I know of one BDC, PNNT, that chooses to mark it's credit facility. That helped them during the crisis, for as asset value declined, so did the value of the credit facility (even though it had to be paid back at par). This is not a common experience.

      Most BDCs have become very attuned to not letting that happen again, that is, getting caught with a tremendous BV decline, which caused them to violate credit facility metrics.

      The industry is far more healthy these days than in the past.

      As to fees, each BDC does it their own way. Some amortize them along the way.

      So, on the revenue line, each quarter, it comes from various sources, real interest income, PIK, fees.

      It's not always easy to now how each BDC does this, but, for me, that is part of the appeal. It's somewhat opaque, harder to understand, causes fear, and thus, investors demand a bit more premium to invest here. Hence, yields are better.

      If you find BDCs that perform, even in the presence of risk, the income is great, that is the challenge.
      If everything was easy here, the yields would be 5%.

    • Jack,
      Did you listen to latest CC? I believe it answers your question and more :)

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