Zacks Industry Outlook Highlights Kayne Anderson BDC and Bain Capital

For Immediate ReleaseChicago, IL – November 22, 2024 – Today, Zacks Equity Research discusses Kayne Anderson BDC, Inc. KBDC and Bain Capital Specialty Finance, Inc. BCSF.Industry: SBIC Commercial FinanceLink: https://www.zacks.com/commentary/2373134/2-sbic-commercial-finance-stocks-to-buy-amid-industry-challengesThe Zacks SBIC & Commercial Finance industry will benefit from a rise in demand for personalized financing solutions as rates come down. An increase in refinancing activity is expected, which will support the industry players’ total investment income growth. The industry will also continue to benefit from favorable regulatory changes.However, gradual deterioration in asset quality because of prolonged high rates is a headwind and might hurt industry players’ financials in the coming days. Nonetheless, a few players like Kayne Anderson BDC, Inc. and Bain Capital Specialty Finance, Inc. are worth a look.About the IndustryThe Zacks SBIC & Commercial Finance industry comprises companies that provide finance to small and mid-sized privately held developing firms. These firms are typically underserved by traditional banks and other lenders.Additionally, firms suffering from financial distress are the primary target clients of these lenders. The industry players provide customized financing solutions, ranging from senior debt instruments to equity capital.This financing is provided for a change of ownership transactions, strategic buyouts, recapitalizations and growth initiatives in partnership with business owners, management teams and financial sponsors, among others. Some of the other products offered by the industry participants are mezzanine loans that typically pay high interest rates and can be converted into equity in the target firm.3 Key Themes to Watch in the SBIC & Commercial Finance IndustryAsset Quality: Following the COVID-19 outbreak and a subsequent halt in business activities in 2020, most sectors wherein SBIC & Commercial Finance companies provide finance were hit hard. This raised fears of a deterioration of asset quality for industry players. Nonetheless, support from the administration in the form of stimulus packages and the subsequent re-opening of businesses supported economic growth. This, thus, prevented a substantial rise in delinquency rates for the industry players.However, with prolonged higher interest rates, industry players are likely to witness some weakness in asset quality as the portfolio companies might find difficulty in servicing debt. Further, heightened geopolitical risk will put a strain on SBIC & Commercial Finance companies’ asset quality.Declining Interest Rates: The Federal Reserve has started cutting interest rates. The central bank lowered the rates by 75 basis points (bps) and the market participants expect another 25-bps cut in December. As the interest rates come down, demand for products and services offered by SBIC & Commercial Finance industry players is likely to improve amid solid economic growth and cooling inflation. Thus, the rise in transaction activity is expected to drive total investment income for these companies.Further, lower rates are expected to lead to a spike in refinancing amid increased competition. So, the industry players will benefit from the same.Regulatory Changes: In 2018, an amendment to the Investment Company Act of 1940 by the Small Business Credit Availability Act eased leverage limits for such companies, allowing them to increase their debt-to-equity leverage to 2:1 from 1:1. This helped these companies reduce portfolio risks by investing in higher capital structures without forgoing current returns. Thus, the act provided extra funding flexibility to these companies and will continue offering more growth opportunities.Zacks Industry Rank Indicates Bleak ProspectsThe Zacks SBIC & Commercial Finance industry is a 34-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #127, which places it in the bottom 49% of more than 250 Zacks industries.The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates underperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of a discouraging earnings outlook for the constituent companies in aggregate. Looking at aggregate earnings estimate revisions, it seems that analysts are gradually losing confidence in this group’s bottom-line growth potential.Before we present a couple of stocks that are well-positioned to outperform the market, let’s check out the industry’s recent stock market performance and valuation picture.Industry Underperforms the Sector and the S&P 500The Zacks SBIC & Commercial Finance industry has underperformed the S&P 500 composite and its sector over the past year.The stocks in this industry have collectively risen 8.8% over this period, while the Zacks S&P 500 composite and the Zacks Finance sector have rallied 30% and 30.4%, respectively.Industry's ValuationOne might get a good sense of the industry’s relative valuation by looking at its price-to-tangible book ratio (P/TB), which is commonly used for valuing loan providers because of large variations in their earnings from one quarter to the next.The industry currently has a trailing 12-month P/TB of 0.95X. The highest level of 1.05X, the lowest of 0.42X and a median of 0.92X have been recorded by the industry over the past five years. Also, the industry is trading at a significant discount compared with the market at large, as evidenced by the trailing 12-month P/TB for the S&P 500 composite of 14.47X.As finance stocks typically have a low P/TB ratio, comparing SBIC & commercial loan providers with the S&P 500 may not make sense to many investors. Hence, comparing the group’s P/TB ratio with its broader sector ensures that the group is trading at a solid discount. The Zacks Finance sector’s trailing 12-month P/TB of 5.19X is also way above the Zacks SBIC & Commercial Finance industry’s ratio.2 SBIC & Commercial Finance Stocks to Bet onKayne Anderson: This Zacks Rank #2 (Buy) firm makes debt investments in middle-market companies (firms with EBITDA in the range of $10-$150 million). Based in Houston, TX, the company has invested almost $11 billion of capital since its inception in 2021.As of Sept. 30, 2024, Kayne Anderson had total investments (fair value) of $1.94 billion in 110 portfolio companies and net asset value (NAV) per share of $16.70. As of the same date, the company had cash and cash equivalents of $61.8 million (including short-term investments).Further, at September 2024-end, KBDC had $788 million in outstanding debt. Also, the company had $437.0 million of undrawn commitments available on its credit facilities.Further, at the end of the third quarter of 2024, Kayne Anderson’s debt-to-equity ratio was 0.66. It targets a debt-to-equity ratio of 1.0 to 1.25. While the company is below its target at present, it expects to continue to grow its private credit portfolio over the coming period to achieve its targeted leverage.The company’s shares have rallied almost 1% so far this year. The Zacks Consensus Estimate for 2024 earnings has been revised 1.5% upward over the past 30 days. KBDC has a market cap of $1.15 billion.Bain Capital: Headquartered in Boston, MA, BCSF is a specialty finance company that primarily invests in U.S. middle-market companies (firms having EBITDA in the range of $10-$150 million). It seeks to invest in senior investments with a first or second lien on collateral, senior first lien, stretch senior, senior second lien, unitranche, mezzanine debt, junior securities, other junior investments and secondary purchases of assets or portfolios.As of Dec 31, 2023, Bain Capital had a total principal debt outstanding of $1.31 billion, significantly higher than the cash and cash equivalents (including restricted cash) of $59.8 million. The company had $432.2 million of undrawn investment commitments as of Sept. 30, 2024.The fair value of BCSF’s total investment portfolio was $2.41 billion as of Sept. 30, 2024, and consisted of investments in 159 portfolio companies across 31 different industries. NAV was $17.76 per share on the same date.Bain Capital has a market cap of $1.07 billion. Shares of this Zacks Rank #2 company have rallied 10.2% so far this year. The Zacks Consensus Estimate for 2024 earnings has moved 1.5% north over the past month. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.Why Haven't You Looked at Zacks' Top Stocks?Since 2000, our top stock-picking strategies have blown away the S&P's +7.0 average gain per year. Amazingly, they soared with average gains of +44.9%, +48.4% and +55.2% per year.Today you can access their live picks without cost or obligation.See Stocks Free >>Media ContactZacks Investment Research800-767-3771 ext. 9339support@zacks.comhttps://www.zacks.comPast performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.5 Stocks Set to DoubleEach was handpicked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2024. While not all picks can be winners, previous recommendations have soared +143.0%, +175.9%, +498.3% and +673.0%.Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.Today, See These 5 Potential Home Runs >>Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Bain Capital Specialty Finance, Inc. (BCSF): Free Stock Analysis Report Kayne Anderson BDC, Inc. (KBDC): Free Stock Analysis ReportTo read this article on Zacks.com click here.Zacks Investment ResearchWeiter zum vollständigen Artikel bei Zacks Weiter zum vollständigen Artikel bei Zacks