UPDATE: Wells Fargo Downgraded BDC Sector; Cuts Four Stocks to Underperform (AINV) (PSEC) (BKCC) (TICC)

March 26, 2013 7:33 AM EDT
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(Updated - March 26, 2013 8:07 AM EDT)

Wells Fargo downgraded BDC sector from Overweight to Market Weight Tuesday, saying it is time to take some profits and limit unnecessary risks.

"YTD, both the overall market and BDC returns have been robust, up 9.6% and 8.7% respectively," the analsyt comments. "This robustness was echoed in the credit markets, with new investment yields near historic lows despite (1) higher leverage multiples and (2) a spike in covenant-lite deals." As a result of the recent price run as well as the potential degradation in new deal quality, they downgraded the space.

In addition the the sector downgrade, Wells Fargo downgraded all quartile 4 BDCs under coverage to Underperform. These include: Apollo Investment Corporation (NASDAQ: AINV), Prospect Capital Corporation (NASDAQ: PSEC), BlackRock Kelso Capital (NASDAQ: BKCC), and TICC Capital Corp. (NASDAQ: TICC).

The firm also downgraded Horizon Technology Finance (NASDAQ: HRZN), PennantPark Investment (NASDAQ: PNNT), THL Credit, Inc. (NASDAQ: TCRD), and Medley Capital Corporation (NYSE: MCC) from Outperform to Market Perform.

"HRZN declined as a result of heightened scrutiny on those BDCs outside of Quartile 1. Both PNNT/MCC were downgraded on valuation as we believe the share price reflects intrinsic value," the firm notes. "TCRD was downgraded as a result of falling to Quartile 2 in our BDC scorecard."

At the same time, the firm is increasing exposure to high quality quartile 1 BDCs including Hercules Technology Growth Capital (NYSE: HTGC), Golub Capital BDC (NASDAQ: GBDC), Ares Capital (NASDAQ: ARCC) and New Mountain Finance (NASDAQ: NMFC).

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