Folks are frequently confused as to why some stocks trade at a premium to others. More often than not, that premium is due to the relative quality of the issues in question. MAIN seem to trade at a premium to other BDCs & that is due, again, to the relative quality between MAIN & other BDCs.

Since the credit crisis began in earnest, the proxy for quality in the BDC sector has been liquidity. BDCs that have it trade at a premium. BDCs that don't have it and can't get it trade at a relative discount. This is hard to see for some because there is no figure of merit for liquidity that can be found on Yahoo! or in an S&P report.

The measuring stick I like to use is a metric I developed called the liquidity ratio. The liquidity ratio is simply capital available for investment divided by the current portfolio value. In other words, if a BDC invested all of it's available capital, how much would the portfolio grow?

This is especially important today when access to capital in the small business space is restricted. Lenders are disappearing from the market & covenants have swung to favor lenders in dramatic fashion. '09 and '10 static pools are likely outperform for some time & having adequate liquidity to weight a portfolio toward those vintages is a significant advantage.

Let's take a sampling of BDCs. Which have the most favorable liquidity ratios?

1.) MAIN 40.60%
2.) FSC 29.95%
3.) PSEC 11.04%
4.) TICC 9.42%
5.) TCAP 9.36%

And how do they rank by current yield over the last week of trading?

1.) MAIN 10.77%
2.) FSC 10.30%
3.) PSEC 16.83%
4.) TICC 13.55%
5.) TCAP 14.56%

It's no surprise that the two BDCs with a material amount of liquidity are at the top of the valuation list.

The real flier in this list is, IMO, TCAP. But they have to make their liquidity a reality before they'll get credit for it. And they will always warrant some small discount due to the less senior composition of their portfolio.

As far as TICC, I think serious DD is required in their schedule of investments. With special attention paid to what their largest investments are, whether or not any of those investments are in industries exposed to the current recession, and what the recent mark-to-cost status of those investments is.