Raymond James Downgraded Goldman Sachs BDC (Not The Bank)

In a report published Monday, Raymond James analyst Robert Dodd downgraded shares of Goldman Sachs BDC Inc (NYSE: GSBD) to Market Perform from Outperform while removing the $23 price target.

Various media reports incorrectly attributed the downgrade to Goldman Sachs Group Inc (NYSE: GS) when the downgrade is actually intended for Goldman Sachs BDC, a closed-end management investment company.

According to Dodd, the downgrade is valuation related, with the stock having reached his $23 price target earlier this week.

"While the outlook remains robust, with earnings projected to exceed the current dividend level in both 2015 and 2016, we believe that same outlook is fully priced in with the shares yielding 7.9 percent and trading at 1.17x on a Price/NAV basis," Dodd wrote. "In addition, we believe current valuation places the shares at an appropriate level versus Goldman Sachs BDC's peers."

Dodd pointed out that the company's closest comparison in valuation is TPG Specialty Lending Inc (NYSE: TSLX) with an 8.5 percent dividend yield. Both firms also have a P/NAV multiple of 1.17x.

In addition, Goldman Sachs BDC's portfolio is 26 percent plain-vanilla first lien and 56 percent first lien including unitrance first lien/last-out loans. This compares to TPG Specialty Lending 90 percent first line, TCP Capital Corp (NASDAQ: TCPC) 38 percent (explicitly first lien, no disclosed unitrance) and Ares Capital Corporation (NASDAQ: ARCC) 27 percent vanilla first lien (34 percent including first lien within last-out structures, footnotes 12-20 in the 10-Q).

As such, Dodd stated that Goldman Sachs BDC is at the lower end of its peer group for plain-vanilla first lien structures and the capital security they have historically provided, though at the higher end when first lien/last-out structures are included.

Finally, Goldman Sachs BDC debt portfolio is composed of approximately 85 percent of floating rate loans which predominantly contain LIBOR floor rates. The fixed/floating mix is close to the range of 79 percent to 97 percent for the same peer group, implying Goldman Sachs represents a "solid" level of floating rate exposure, though it is "not particularly an outlier."