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North America Equity Research04 August 2014

Equity Ratings and Price Targets

Mkt Cap Rating Price TargetCompany Ticker ($ mn) Price ($) Cur Prev Cur PrevAmerican Capital ACAS US 4,007.43 15.22 OW n/c 18.50 n/cApollo Investment AINV US 1,995.73 8.43 OW n/c 9.00 8.50Ares Capital ARCC US 4,990.06 16.73 OW NR 18.50 —BlackRock Kelso Capital BKCC US 646.21 8.68 N n/c 9.00 n/cFifth Street Finance Corp. FSC US 1,342.68 9.65 OW n/c 9.50 10.00PennantPark Investment PNNT US 745.02 11.22 N n/c 11.00 n/cSolar Capital SLRC US 858.85 19.81 OW N 22.50 n/cWhiteHorse Finance WHF US 208.11 13.89 OW n/c 14.50 n/cSource: Company data, Bloomberg, J.P. Morgan estimates. n/c = no change. All prices as of 01 Aug 14.

BDC PreviewWidening Spreads and Floating Rate Investments Should Benefit the Sector

Specialty & Consumer Finance

Richard Shane AC

(1-415) 315-6701

[email protected]

Bloomberg JPMA SHANE <GO>

J.P. Morgan Securities LLC

See page 27 for analyst certification and important disclosures.J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

This week starts the peak of reporting season in the BDC sector. Below we offer our perspective on the space headed into earnings. We are also establishing our Dec-15price targets for the sector based on December 2015 NAV estimates.

Expect gross origination volumes in line with 1H13 with less refi activity. For

the broader middle market space, 1H14 new issuance volume of $6.4B is slightly below that of 1H13 ($6.9B). We anticipate that the BDCs will have gross originations similar to that of 1H13 with fewer refinancings, akin to the reduction seen in the broader middle market. Consequently, we anticipate higher 1H14 net originations compared to 1H13.

LIBOR remains at historical low, but spreads widen. Middle market spreads

widened during the quarter and are up during 1H14 from 452 bps to 502 bps for B+/B loans/issuers and from 334 bps to 400 bps for BB/BB- loans/issuers. We expect that the wider LIBOR spreads should translate into higher yields on new investments made in 2Q14 with NAVs essentially flat versus 1Q14.

BDCs are well-positioned for rising rate environment. The BDC portfolios are

increasingly well-positioned for a rising rate environment. As investor expectations focus on the prospect of rising interest rates, the BDCs under our coverage have increasingly positioned the portfolios in favor of floating interest rate investments, which should benefit when interest rates rise (especially as they increase more than 50 basis points). From 4Q13 to 1Q14, nearly all of the BDCs we cover increased their floating rate loan exposure and we expect the trend to continue into 2Q14.

Dividends generally secure. Most of the BDCs have dividend coverage (LTM NII

divided by dividends) close to or in excess of 100%, which we consider to be very safe. For the handful of companies that have dividend coverage below 90%, we will keep a watchful eye on NII trends this quarter, as it may impact the sustainability of current dividend levels.

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Richard Shane(1-415) [email protected]

2Q14 Middle Market Issuance Volumes

1H14 middle market new issue volume totaled $6.4B, compared to $6.9B for 1H13, and was in line with post-recession volumes. Despite recovering from the 2009 issuance low of $5.3B for the entire year, middle market volumes are nowhere near the peak levels seen in previous cycles ($41.3B in 1999 and $34.8B in 2005).

Figure 1: Middle Market Issuance Volume Down Slightly from 2013$ in billions

Source: S&P LCD

Refinancing as a percentage of new issuance in the middle market space has declined over recent quarters, as many companies have already extended their debt maturities at relatively lower interest rates.

Figure 2: Refinancing as a Percentage of New Issuance has Dropped$ in millions

Source: S&P LCD

26.7

38.741.3

34.5

11.917.2

12.5

26.0

34.8 34.228.7

8.05.3

11.414.3

10.113.4

6.9 6.4

0.0

10.0

20.0

30.0

40.0

50.0

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

1H13

1H14

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14

Refinancing Volume % of New Issuance for Refinancing

3



Figure 3: 1H14 New Issuance Volume by Purpose

Source: S&P LCD

Figure 4: 2Q14 New Issuance Volume by Purpose

Source: S&P LCD

For the 2Q14 results to be announced this week we expect to see modest refinancing activity given continued low interest rates; however, we note that the pace of refinancing activity has declined in recent quarters.

Figure 5: BDC Investment Originations & Exits$ in billions

Source: Company reports and J.P. Morgan estimates.

Refinancing, 21%

LBO, 42%

Dividend/Recap, 16%

Merger & Acquisition, 18%

Other, 3%

Refinancing, 16%

LBO, 41%Dividend/Recap,

18%

Merger & Acquisition, 21%

Other, 4%

3.1

1.5

2.7 2.4

4.0 3.3

(2.7)

(1.2)(1.7) (1.9)

(2.6) (2.8)

0.4 0.3 1.0

0.5

1.4 0.5

(4.0)

(3.0)

(2.0)

(1.0)

0.0

1.0

2.0

3.0

4.0

5.0

4Q12 1Q13 2Q13 3Q13 4Q13 1Q14

Gross Originations Repayments/Exits Net Originations

4



Spreads Widen as LIBOR Remains Compressed

While LIBOR rates remain at historic lows (below 25 bps for 3-month LIBOR), middle market spreads to LIBOR widened in 1H14. The all-in institutional spread for B+/B rated loans ended the June quarter at 501.8 bps compared to 452.0 bps as of 12/31/13. The LIBOR spread for BB/BB- rated loans ended the June quarter at 399.8 bps compared to 334.3 bps as of 12/31/13.

Figure 6: Middle Market All-In Institutional Spreads to LIBOR Widened in 2Q14bps

Source: S&P LCD

The BDC portfolios are increasingly well-positioned for a rising rate environment. As investor expectations increasingly focus on the prospect of rising interest rates, the BDCs under our coverage have increasingly positioned the portfolios in favor of floating interest rate investments, which should benefit when interest rates rise (especially as they increase more than 50 basis points). From 4Q13 to 1Q14, nearly all of the BDCs we cover increased their floating rate loan exposure, and we expect the trend to continue into 2Q14.

Table 1: BDC Fixed Rate vs. Floating Rate Exposure

4Q13 Fixed/Floating

1Q14 Fixed/Floating

ARCC* 9% / 91% 9% / 91%

ACAS* 51% / 49% 35% / 65%

AINV 61% / 39% 58% / 42%

BKCC 52% / 48% 60% / 40%

FSC 28% / 72% 26% / 74%

PNNT 48% / 52% 44% / 56%

SLRC 35% / 65% 30% / 70%

WHF 12% / 88% 10% / 90%

Source: Company reports.

Note: Excludes investments on non-accrual status. ARCC and ACAS exclude non-interest bearing investments.

In the upcoming 2Q14 results to be released, we anticipate less yield pressure than in previous quarters as repayments drop and historically low default rates begin to revert to the mean.

399.8

501.8

200.0

300.0

400.0

500.0

600.0

700.0

800.0

900.0

Sep

-10

Dec

-10

Mar

-11

Jun-

11

Sep

-11

Dec

-11

Mar

-12

Jun-

12

Sep

-12

Dec

-12

Mar

-13

Jun-

13

Sep

-13

Dec

-13

Mar

-14

Jun-

14

BB / BB- B+ / B

2Q14

5



Credit Metrics Are Mixed

The LTM default rate, which was at historic lows in previous quarters, jumped meaningfully during 2Q14, as shown in Figure 7, which shows the LTM default rate for high-yield bonds and leveraged loans.

Figure 7: TXU Skews the Default Picture$ in millions

Source: J.P. Morgan High-Yield Credit team

We note that what looks like a significant jump in the default rate in 2Q was the result of one large deal that defaulted, energy company TXU, in April. Looking at the total leveraged loan data set, we see that including the impact of this large default makes the LTM default rate jump to 2.8%. However, when we back out the impact of this one transaction, the default rate adjusts down to 0.9%, indicating that the higher default rate is driven by a large outlier, rather than a broader normalization of credit. The J.P.Morgan High Yield & Leveraged Loan Strategy team is projecting that defaults will remain below average for the next two years.

Middle market debt multiples (see Figure 8) have risen to historic highs. Debt/EBITDA as of 2Q14 reached 5.15x and senior debt/EBITDA ended 2Q14 at 5.09x, both metrics surpassing previous highs. 2Q14 EBITDA/cash interest remains does not appear to be stretched at 3.44x, although we note that any economic weakness could erode EBITDA and push that multiple higher.

Figure 8: Pro Forma Credit Statistics of Middle Market Transactions

Source: S&P LCD

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

Dec-98 Dec-00 Dec-02 Dec-04 Dec-06 Dec-08 Dec-10 Dec-12

Default Rate ex-TXU Leveraged Credit - Par weighted default rate

Peaked in Nov 09

June 2014: 2.8%15 yr Average 3.5%

June 2014: 0.9%

1x

2x

3x

4x

5x

6x

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

1Q14

2Q14

Debt / EBITDA Senior Debt / EBITDA EBITDA / Cash Interest

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Accordingly, we expect BDC credit metrics (such as non-accruals) to move slightly higher in 2Q14, although we do not expect it to weigh heavily on the sector overall.

In evaluating the credit environment, we also consider the issuance of covenant-lite loans (loans that have bond-like incurrence covenants rather than higher-standard maintenance requirements). The number of cov-lite loans spiked to $262B with 386 deals in 2013, far outpacing the previous record of $97B with 125 deals in 2007. The $149B volume with 226 deals in 1H14 is set to outpace 2013’s record. (For 1H13, the cov-lite issuance volume totaled $139B in 202 deals).

Figure 9: Covenant-Lite Issuance Abounds$ in billions

Source: S&P LCD

Muted NAV Accretion Expected

We employ a correlation analysis to project NAV accretion each quarter. Based on this analysis, we anticipate NAV values to increase approximately 20 bps on average for 2Q14. Our BDC correlation analysis references the indices listed below:

BDC equity portfolio FV/Cost with Smid-Cap Index (58.2% average correlation from 2009 to present). The MSCI US SMid-Cap Index was up 3.9% Q/Q.

BDC senior secured debt portfolio FV/Cost with JPM Leveraged Loan Index (65.7% average correlation from 2009 to present). The index was flat Q/Q.

BDC subordinated portfolio FV/Cost with JPM 2nd Lien Loan Index (64.2% average correlation from 2009 to present). The index gained 0.7% Q/Q.

$2 $3 $0 $0 $0 $0 $1 $0 $2$24

$97

$3 $3 $8

$57$91

$262

$139$149

0

100

200

300

400

500

$0

$50

$100

$150

$200

$250

$300

Volume Number of Deals

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Table 2: BDC NAV Adjustments for 2Q14


Dividends – Mostly Secure

In evaluating the BDCs under our coverage, dividend yield is a significant component of total return. In Figure 10 we consider the dividend coverage (the LTM NII divided by the LTM dividends paid) in assessing the “security” of the dividend or the likelihood of a company’s dividend being reduced. The greater the portion of the dividend that is earned through NII, the safer the dividend is considered to be. Most of the BDCs we cover aim to earn 100% of the dividend through NII.

Figure 10: BDC Dividend Coverage


It is worth noting that during 2Q14 adjustments were made to the dividend amounts for BKCC and FSC. BKCC lowered its dividend $0.05 to $0.21 per quarter. Applying the new, lower dividend rate in the coverage analysis would boost BKCC from 78% dividend coverage to a more secure 96% dividend coverage. FSC, with previous dividend coverage of 92%, boosted its dividend 10%, which would bring its

1Q14A NAV 2Q14E NAV Q/Q E

per share per share Change

ACAS1

$19.29 19.41$ 0.6%

ACAS2

$17.69 17.81$ 0.7%

AINV $8.67 8.70$ 0.3%

ARCC $16.42 16.44$ 0.1%

FSC $9.81 9.83$ 0.2%

PNNT $11.13 11.12$ -0.1%

SLRC $22.43 22.46$ 0.1%

WHF $15.23 15.23$ 0.0%

Average 0.2%

1 GAAP NAV

2 Ex -DTA NAV

NAV/Share

113% 102%

78%

92%97%

91%

91%

70%

80%

90%

100%

110%

120%

$0.00

$0.25

$0.50

$0.75

$1.00

$1.25

$1.50

$1.75

$2.00

AINV ARCC BKCC FSC PNNT SLRC WHF

LTM NII LTM Div Dividend Coverage

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dividend coverage down to 89%. The dividend coverage data using the adjusted amounts is provided below.

Figure 11: Dividend Coverage - Adjusted


In our estimation, the longer a BDC pays out a dividend in excess off NII/sh, the more unsustainable that dividend becomes and the greater the likelihood of a dividend cut. With FSC’s recent dividend increase, we believe it needs to quickly deploy capital recently raised to boost NII/sh to better cover the recently increased dividend. It is also possible that the WHF dividend could be adjusted downward if those companies do not generate increased NII/sh in the next several quarters.

96%89%

70%

75%

80%

85%

90%

95%

100%

$0.0

$0.2

$0.4

$0.6

$0.8

$1.0

$1.2

BKCC FSC

LTM NII Expected Div Dividend Coverage

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American Capital

Overweight

Company DataPrice ($) 15.22Date Of Price 01-Aug-14 52-week Range ($) 16.37-12.42Market Cap ($ bn) 4.01Fiscal Year End DecShares O/S (mn) 263Price Target ($) 18.50Price Target End Date 31-Dec-15

American Capital, LTD. (ACAS;ACAS US)

FYE Dec 2011A 2012A 2013A 2014E(Prev)

2014E(Curr)

EPS ($)Q1 (Mar) 0.23 0.24 0.21 0.23 0.06AQ2 (Jun) 0.20 0.29 0.21 0.24 0.23Q3 (Sep) 0.19 0.27 0.16 0.25 0.23Q4 (Dec) 0.24 0.36 0.19 0.25 0.23FY 0.85 1.16 0.76 0.97 0.75

Source: Company data, Bloomberg, J.P. Morgan estimates.

Investment Thesis, Valuation and Risks

American Capital (Overweight; Price Target: $18.50)

Investment Thesis

Maintain Overweight rating. American Capital is one of our best ideas for value investors seeking a leveraged investment on long-term economic recovery. We believe that shares will remain volatile based on direct exposure to leveraged, middle-market businesses in the U.S. and Europe. That said, we believe the intrinsic value of the underlying portfolio supports price appreciation. The recent announcement by management about suspending the share buyback program to evaluate the optimum corporate structure may result in corporate transactions that could serve as potential catalysts to unlock value. We note that the stock trades at 86% of NAV (DTA-adjusted) on a portfolio marked at 92% of cost. However, our thesis does not depend on the fair value mark of the portfolio returning to cost (an extremely unrealistic scenario), but rather that the current discounted P/NAV ratio provides compelling value and upside opportunity. In our view, substantial cashflows both from operating sources and repayments of existing investments will support a combination of new investments, debt repayment, and share repurchases.

Valuation

We establish our Dec15 price target of $18.50, unchanged from 2014, which implies a projected annualized total return of 14.4%. In late March, in conjunction with ACAS’s normal end-of-quarter press release, the company announced that it has suspended the ongoing share repurchase. The company indicated the BoD is reviewing strategies to optimize corporate structure to enhance shareholder value. This announcement, combined with management’s earlier comments on the 4Q13 earnings call related to potential spin-out scenarios, appears to increase the probability of ACAS splitting into two (or more) vehicles. With shares of ACAS trading at 79% of NAV, or 86% of NAV ex-DTA, we believe an improved structure could “un-lock” embedded value. While there are several potential scenarios, we believe the most likely involves spinning out ACAS’s investment management business ACAM, as a separately traded public company.

Through 1Q14, ACAM had $13B of earning AUM and a LTM EBITDA of $106M. ACAS held the investment in ACAM at $805M of fair value (roughly 7.6x P/EBITDA). While multiples for asset managers vary widely, we believe that as a publicly traded company, ACAM could trade between 10x and 12x EBITDA, based

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on historical trading ranges and recent comparables. At the midpoint, this represents a 45% premium to the current carrying value of ACAM (roughly $1.30 to $1.40 of incremental value).

Based upon the increased probability of a revised (and more attractive corporate structure), we have established our Dec 2015 PT for ACAS at $18.50.. Our valuation framework for ACAS assumes the following: (1) 25% probability of NO to change to structure, in which case we assume that ACAS will trade to our previous price target of $16.50/share, and (2) 75% probability of restructuring ($19/share), which uses a sum-of-the-parts valuation methodology, with a range of multiples for each component.

Risks to Rating and Price Target

Downside risks. American Capital assumes substantial portfolio risk by investing in private, non-investment grade companies. As a result of its investment in European Capital, ACAS is directly and indirectly exposed to risk stemming from the European debt crisis. ACAS remains highly subject to earnings volatility and capital losses. Also, substantially all of ACAS’s investments are subject to legal and other restrictions on resale and are less liquid than publicly traded securities. Unlike a mutual fund, which can be repositioned relatively quickly, ACAS’s investments generally have five- to seven-year holding periods. If ACAS is required to liquidate its portfolio, the company may not be able to realize the carrying value of the securities. This could lead to reduced earnings or impairments of book value and/or share price declines. ACAS does not currently pay dividends and is not a regulated investment company for tax purposes. This makes the company more volatile with higher risk than a typical BDC that distributes dividend income. If ACAS were to experience a significant decline in the fair value of the portfolio, we would expect the company to underperform its peers.

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Apollo Investment

Overweight

Company DataPrice ($) 8.43Date Of Price 01-Aug-14 52-week Range ($) 9.21-7.73Market Cap ($ bn) 2.00Fiscal Year End MarShares O/S (mn) 237Price Target ($) 9.00Price Target End Date 31-Dec-15

Apollo Investment Corporation (AINV;AINV US)

FYE Mar 2013A 2014A 2015E 2016EEPS ($)Q1 (Jun) 0.20 0.25 0.20 0.21Q2 (Sep) 0.22 0.22 0.21 0.21Q3 (Dec) 0.21 0.22 0.21 0.21Q4 (Mar) 0.21 0.21 0.21 0.21FY 0.83 0.90 0.83 0.84



Apollo Investment (Overweight; Price Target: $9.00)

Investment Thesis

Maintain Overweight rating. AINV emerged from a series of setbacks in 2011 with a new management team, a reshaped strategy, and an improved capital structure. AINV’s investment prospects have improved as the company has rotated the portfolio into less liquid senior secured credit, from more liquid subordinate credit. We believe this portfolio strategy has helped to dampen yield compression in a low-rate environment.

Valuation

We are establishing a Dec-15 price target of $9, up from our Dec-14 price targetof $8.50. This is based on a 1.0x multiple on CYE2015 forecast NAV of $8.77. Given our expectation for higher NAV accretion and the fact that we no longer view AINV as a transition story (portfolio transition has been under way for several quarters), we believe it is reasonable to expect AINV to trade at 1.0x NAV or in line with our expectations for the peer average. This implies a potential total annualizedreturn of 14.0%.


Downside risks. Apollo Investment Corp. assumes substantial portfolio risk by investing in private, non-investment grade companies. While the company seeks to mitigate this risk through diversification (across companies, industries, geographies, and instruments) and investment selection, it remains subject to earnings volatility and capital losses. Also, substantially all of these investments are subject to legal and other restrictions on resale and are less liquid than publicly traded securities. If AINV is required to liquidate its portfolio, the company may not be able to realize the carrying value of the securities. This could lead to reduced earnings or impairments of book value, potentially triggering dividend cuts and/or share price declines.

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Ares Capital

Overweight

Company DataPrice ($) 16.73Date Of Price 01-Aug-14 52-week Range ($) 18.58-16.47Market Cap ($ mn) 4,990.06Fiscal Year End DecShares O/S (mn) 298Price Target ($) 18.50Price Target End Date 31-Dec-15

Ares Capital Corporation (ARCC;ARCC US)

FYE Dec 2011A 2012A 2013A 2014E(Prev)

2014E(Curr)

EPS ($)Q1 (Mar) 0.31 0.38 0.38 0.36 0.38AQ2 (Jun) 0.34 0.40 0.38 0.37 0.40Q3 (Sep) 0.42 0.42 0.48 0.39 0.41Q4 (Dec) 0.47 0.38 0.41 0.38 0.41FY 1.54 1.59 1.66 1.50 1.60



Ares Capital (Overweight; Price Target: $18.50)

Investment Thesis

We are updating our view following a period of restriction. We maintain our Overweight rating on ARCC. We believe the strength of ARCC’s origination platform, sizable balance sheet, and ample liquidity position the company favorably in a competitive investing environment. Particularly in the current tight spread environment, we believe ARCC’s scale and industry relationships enable the BDC to continue to make competitive, high-credit-quality investments. The company stands to benefit in a rising rate environment as well since the portfolio is predominantly floating rate. As a result, we believe ARCC should trade at the high end of the peer group (10-15% premium to NAV).

Valuation

We establish a Dec-15 price target of $18.50, up from our Dec-14 price target of $18, which represents a 1.1x multiple on our YE 2015 NAV estimate of $16.75. We believe a 1.1x multiple (consistent with previous multiple, and a 10% premium to the rest of the group) is appropriate for ARCC given our view of the company as the best-managed BDC in our coverage. Our target price equates to a potential total return of 16.1% by December 2015.


Downside risks. Ares Capital assumes substantial portfolio risk by investing in private, non-investment-grade companies. While the company seeks to mitigate this risk through diversification (across companies, industries, geographies, and instruments) and investment selection, it remains subject to earnings volatility and capital losses. Also, substantially all of these investments are subject to legal and other restrictions on resale and are less liquid than publicly traded securities. If ARCC is required to liquidate its portfolio, the company may not be able to realize the carrying value of the securities. This could lead to reduced earnings or impairments of book value, potentially triggering dividend cuts and share price declines. As a BDC, ARCC is required to distribute at least 90% of taxable income to shareholders in the form of a dividend. We expect that ARCC will periodically issue new shares. Overhang from potential offerings may limit share price appreciation.

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BlackRock Kelso Capital

Neutral

Company DataPrice ($) 8.68Date Of Price 01-Aug-14 52-week Range ($) 10.35-8.25Market Cap ($ mn) 646.21Fiscal Year End DecShares O/S (mn) 74Price Target ($) 9.00Price Target End Date 31-Dec-15

BlackRock Kelso Capital Corporation (BKCC;BKCC US)

FYE Dec 2011A 2012A 2013A 2014E 2015EEPS ($)Q1 (Mar) 0.25 0.28 0.38 0.27A 0.22Q2 (Jun) 0.53 0.29 0.14 0.37A 0.22Q3 (Sep) 0.18 0.19 0.27 0.19 0.21Q4 (Dec) 0.10 0.02 0.37 0.15 0.13FY 1.05 0.78 1.12 0.98 0.79



BlackRock Kelso Capital (Neutral; Price Target: $9.00)

Investment Thesis

Maintain Neutral. Our Neutral outlook on BKCC reflects our view that the stock is fairly valued in light of a more stable dividend with limited potential growth. We believe that BKCC remains one of the more conservatively managed BDCs within our coverage universe. As a result, we believe capital deployment will remain relatively low. This strategy should serve the company well in a deteriorating economic environment or during periods of modest market dislocation, but we believe in the current environment other BDCs in our universe have better growth prospects.

Valuation

We establish a Dec-15 price target of $9, unchanged from our Dec-14 price target. We have adjusted our earnings estimates to account for possible fluctuations in unrealized gains and losses. We apply a 0.95x multiple to our YE2015 estimated NAV of $9.81 to get our price target. This multiple is lower relative to other peers, which tend to trade around 1.0x NAV. We believe the relatively lower multiple is appropriate given BKCC’s investment portfolio strategy. Our price target equates to a projected total return through CY2015 of 12.1%.


Downside and upside risks. BKCC assumes substantial portfolio risk by investing in private, non-investment-grade companies. While the company seeks to mitigate this risk through diversification and investment selection, it remains subject to earnings volatility and capital losses. Also, substantially all of these investments are subject to legal and other restrictions on resale and are less liquid than publicly traded securities. If BKCC is required to liquidate its portfolio, the company may not be able to realize the carrying value of the securities. This could lead to reduced earnings or impairments of book value, potentially triggering dividend cuts and share price declines. As a RIC/BDC, BKCC is required to fully distribute income through dividends, severely limiting its ability to retain capital. As a result, BKCC must continually access the equity markets. BKCC may face difficulty in issuing equity during periods when shares trade below NAV. Finally, BKCC relies on leverage to enhance returns. Reduced access to leverage or increases in borrowing costs could

14



materially impact BKCC’s performance. If rates rise materially in 2014, BKCC could outperform other companies in our universe due to a higher portfolio yield.

15



Fifth Street Finance Corp.

Overweight

Company DataPrice ($) 9.65Date Of Price 01-Aug-14 52-week Range ($) 10.91-8.94Market Cap ($ mn) 1,342.68Fiscal Year End SepShares O/S (mn) 139Price Target ($) 9.50Price Target End Date 31-Dec-15

Fifth Street Finance Corp. (FSC;FSC US)

FYE Sep 2012A 2013A 2014E(Prev)

2014E(Curr)

2015E

EPS ($)Q1 (Dec) 0.27 0.27 0.26A 0.26A 0.26Q2 (Mar) 0.28 0.27 0.28 0.24A 0.26Q3 (Jun) 0.26 0.25 0.26 0.27 0.26Q4 (Sep) 0.26 0.23 0.26 0.27 0.25FY 1.07 1.01 1.03 1.01 1.01Bloomberg EPS FY ($) 1.09 1.06 - 1.03 1.05Source: Company data, Bloomberg, J.P. Morgan estimates.


Fifth Street Finance Corp. (Overweight; Price Target: $9.50)

Investment Thesis

Maintain Overweight rating. FSC is one of only five BDCs to have crossed the $1.5B asset threshold, which we believe affords FSC competitive advantages that include more consistent access to equity, lower borrowing costs, increased operating leverage, and greater transaction flexibility. We expect FSC to increase leverage and make substantial progress in its varied initiatives to boost NII and covering the recently increased dividend through NII.

Valuation

We establish a Dec-15 price target of $9.50, down from our $10 Dec-14 price target, which implies a potential total annualized return of 10.2%. Our price target is based upon a 1.0x multiple on our projected CYE2015 NAV of $9.69. The 1.0x multiple is in line with the industry average.


Downside risks. FSC is pursuing higher-yielding strategies, which may be more volatile and lead to greater losses during recessionary environments. FSC assumes substantial portfolio risk by investing in private, non-investment-grade companies. While it attempts to mitigate this risk through diversification and investment selection, it remains subject to earnings volatility and capital losses. If FSC is required to liquidate its portfolio, it may not be able to realize the carrying value of the securities. This could lead to reduced earnings or impairments of book value, potentially triggering dividend cuts and/or share price declines. While FSC has gradually shifted a larger portion of its portfolio to floating-rate loans, the portfolio still maintains some investments in fixed-rate loans to companies. A large portion of FSC’s corporate borrowings are at floating rates. Should interest rates rise (LIBOR), FSC’s cost of capital will rise while interest derived from the fixed-rate portion of its loan portfolio would remain unchanged. This could pressure NIM. As a RIC/BDC, FSC is required to fully distribute income through dividends, severely limiting its ability to retain capital. As a result, FSC must continually access the equity markets. FSC may face difficulty in issuing equity during periods when shares trade below NAV. Finally, FSC relies on leverage to enhance returns. Reduced access to leverage or increases in borrowing costs could materially impact FSC’s performance.

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PennantPark Investment

Neutral

Company DataPrice ($) 11.22Date Of Price 01-Aug-14 52-week Range ($) 12.19-10.33Market Cap ($ bn) 0.75Fiscal Year End SepShares O/S (mn) 66Price Target ($) 11.00Price Target End Date 31-Dec-15

PennantPark Investment Corporation (PNNT;PNNT US)

FYE Sep 2012A 2013A 2014E 2015E(Prev)

2015E(Curr)

EPS ($)Q1 (Dec) 0.33 0.27 0.27A 0.30 0.30Q2 (Mar) 0.17 0.21 0.30A 0.29 0.29Q3 (Jun) 0.28 0.27 0.30 0.30 0.30Q4 (Sep) 0.30 0.25 0.30 0.30 0.30FY 1.08 1.01 1.18 1.18 1.18



PennantPark Investment (Neutral; Price Target: $11.00)

Investment Thesis

Maintain Neutral rating. PNNT is a conservatively managed BDC with a six-year history of consistent dividends and a strong credit history. Based on our outlook for portfolio growth and capital deployment, we believe PNNT’s dividend remains relatively secure. We believe the BDC as fairly valued at 1.0x NAV.

Valuation

We establish a Dec-15 price target of $11, unchanged from our Dec-14 price target. Our price target is based upon a 1.0x multiple applied to our projected CYE2015 NAV of $11.34. This multiple is in line with the general peer group, which we believe is appropriate, given the investment portfolio and strategy. Our price target represents a potential total return of 8.7% through CYE2015.


Downside and upside risks. PennantPark assumes substantial portfolio risk by investing in private, non-investment-grade companies. While the company seeks to mitigate this risk through investment selection, it remains subject to earnings volatility and capital losses. These investments are subject to legal and other restrictions on resale and are less liquid than publicly traded securities. If PNNT is required to liquidate its portfolio, the company may not be able to realize the carrying value of the securities. This could lead to reduced earnings or impairments of book value, potentially triggering dividend cuts and share price declines. PNNT borrows floating-rate (Libor-based) debt, creating a negative duration gap. As a RIC/BDC, PNNT is required to fully distribute income through dividends, severely limiting the company’s ability to retain capital. As a result, PNNT must continually access the equity markets. PNNT may face difficulty in issuing equity during periods when shares trade below NAV. Finally, PNNT relies on leverage to enhance returns. Reduced access to leverage or increases in borrowing costs could materially impact PNNT’s performance. If rates rise materially, PNNT may outperform other companies in our universe due to a higher portfolio yield.

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Solar Capital

Overweight


Solar Capital LTD. (SLRC;SLRC US)

FYE Dec 2011A 2012A 2013A 2014E(Prev)

2014E(Curr)

EPS ($)Q1 (Mar) 1.35 1.26 0.81 0.31A 0.31AQ2 (Jun) 0.34 0.44 (0.00) 0.40 0.39Q3 (Sep) (1.42) 0.82 0.24 0.39 0.39Q4 (Dec) 1.42 0.61 0.65 0.39 0.39FY 1.68 3.11 1.69 1.49 1.49Bloomberg EPS FY ($) 2.05 2.20 1.89 - 1.62Source: Company data, Bloomberg, J.P. Morgan estimates.


Solar Capital (Overweight; Price Target: $22.50)

Investment Thesis

Upgrade to OW rating. SLRC has built a high-quality portfolio since going public in 2009. The company is conservatively managed, and the underlying portfolio has exhibited strong credit performance. In light of the recent Crystal Financial acquisition, we believe management is focused on seeking investment opportunities that diversify the portfolio and enhance yield in the current low rate environment (the investment yields 11-12% in dividends). We assign the stock an Overweight rating in light of the stock’s substantial discount to NAV combined with the high dividend yield.

Valuation

We establish a Dec-15 price target of $22.50, unchanged from our Dec-14 price target. Our target price represents an NAV multiple of 1.0x applied to our projected CYE2015 NAV of $22.75. We believe the multiple is appropriate given the potential for further elevated investment exits and is consistent with the level at which the comp group trades. Our price target equates to a potential total return of 17.1%.


Downside and upside risks. Solar Capital assumes substantial portfolio risk by investing in private, non-investment-grade companies. While the company seeks to mitigate this risk through diversification (across companies, industries, geographies, and instruments) and investment selection, it remains subject to earnings volatility and capital losses. Also, substantially all of these investments are subject to legal and other restrictions on resale and are less liquid than publicly traded securities. If SLRC is required to liquidate its portfolio, the company may not be able to realize the carrying value of the securities. This could lead to reduced earnings or impairments of book value, potentially triggering dividend cuts and share price declines. Should SLRC not be able to achieve its investment objectives and the value of the investments declines, the stock likely would underperform its peers. If macroeconomic conditions and credit markets improve faster than we have modeled, the company could experience NAV accretion and the stock could outperform. If the capital deployment occurs faster than forecast, the company likely would exceed expectations given the portfolio yield is maintained.

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WhiteHorse Finance

Overweight


WhiteHorse Finance, Inc. (WHF;WHF US)

FYE Dec 2012A 2013A 2014E(Prev)

2014E(Curr)

EPS ($)Q1 (Mar) - 0.23 0.43A 0.43AQ2 (Jun) - 0.21 0.28 0.32Q3 (Sep) - 0.40 0.31 0.31Q4 (Dec) - 0.42 0.31 0.31FY 0.94 1.27 1.30 1.35



WhiteHorse Finance (Overweight; Price Target: $14.50)

Investment Thesis

Maintain Overweight. Our Overweight rating is based upon our view that the company offers a compelling total return through potential price appreciation and expected dividend yield. WHF has a differentiated self-origination strategy, which may lead WHF to experience less yield compression vs. peers. WHF’s access to H.I.G.’s proprietary small-cap deal sourcing network enables it to originate deals that are less liquid and less competitive to source than large and mid-cap loans in the marketplace. Given the BDC’s short operating history, we believe the company is fairly valued around 1.0x book value.

Valuation

We establish a Dec-15 price target of $14.50, unchanged from our Dec-14 price target. This is based on a 1.0x multiple (in line with the peer average) applied to our estimated CYE2015 NAV of $15.12. Our price target implies an annualized total return of 11.9%. We believe the company’s short operating history should lead the company to trade in line with the peer group average. However, we believe the dividend may be cut in 4Q14, given the lower degree of dividend coverage through NII. If the dividend is cut, we believe the stock may trade below NAV.


Downside risks. WhiteHorse Finance assumes substantial portfolio risk by investing in private, non-investment-grade companies. If WHF is required to liquidate its portfolio, the company may not be able to realize the carrying value of the securities. This could lead to reduced earnings or impairments of book value, potentially triggering dividend cuts and/or share price declines. Over the last 12 months, WHF has not covered the dividend through NII and any future lowering of the dividend could cause the stock to trade below NAV. WHF’s investments are primarily floating rate. WHF borrows floating-rate (repo) debt, creating a negative duration gap. As anRIC/BDC, WHF is required to fully distribute income through dividends, severely limiting the company’s ability to retain capital. As a result, WHF must continually access the equity markets. WHF may face difficulty issuing equity issuance during periods when shares trade below NAV. Finally, WHF relies on leverage to enhance returns. Reduced access to leverage or increases in borrowing costs could materially impact WHF’s performance.

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American Capital: Summary of FinancialsIncome Statement FY13 FY14E FY15E FY16E Cash flow statement 1Q14A 2Q14E 3Q14E 4Q14E

Interest Income 423 402 440 - Interest Income 71A 112 111 108Dividend Income - - - - Dividend Income - - - -

Total Investment Income 487 460 500 - Total Investment Income 84A 127 126 123Interest Expense (44) (37) (23) - Interest Expense (12)A (10) (8) (7)Tax (76) (144) (187) - Tax (11)A (44) (44) (45)

Total expense (255) (251) (228) - Total expense (68)A (63) (61) (58)Net Investment Income 156 65 85 - Net Investment Income 5A 20 20 20Net Realized Gain (Loss) (55) 21 0 - Net Realized Gain (Loss) 21A 0 0 0

Net Unrealized Gain (Loss) 83 40 0 - Net Unrealized Gain (Loss) 44A (4) 0 0Net income 184 130 85 - Net income 70A 20 20 20

Shares O/S 270 263 263 - Shares O/S 263A 263 263 263Weighted Avg.Shares O/S 304 278 276 - Weighted Avg.Shares O/S 283A 276 276 276Operating EPS 0.76 0.75 0.99 - Operating EPS 0.06A 0.23 0.23 0.23

GAAP EPS 0.61 0.47 0.31 - GAAP EPS 0.25A 0.07 0.07 0.07DPS 0.00 0.00 0.00 - DPS 0.00A 0.00 0.00 0.00

Balance sheet FY13 FY14E FY15E FY16E Ratio Analysis FY13 FY14E FY15E FY16E

Investments 5,072 4,775 4,875 - EPS growth (34.1%) (1.4%) 30.9% -Cash and cash equivalents 315 468 468 - ROA 3.8% 3.5% 4.7% -

Total assets 6,009 5,844 5,805 - ROE 4.4% 4.1% 5.3% -Debt to equity 15.4% 8.6% 6.1% -

Total Debt 791 444 320 - BVPS 18.97 19.50 19.82 -

total Liabilities 883 710 586 - Dividend payout ratio 0.0% 0.0% 0.0% -Dividend Yield 0.0% 0.0% 0.0% -

Shareholders' equity 5,126 5,134 5,219 -


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Apollo Investment: Summary of FinancialsIncome Statement FY14 FY15E FY16E FY17E Cash flow statement 1Q15E 2Q15E 3Q15E 4Q15E

Interest Income 337 359 361 - Interest Income 88 90 90 90Dividend Income 32 28 28 - Dividend Income 8 6 8 6

Total Investment Income 381 401 403 - Total Investment Income 99 100 102 100Interest Expense (69) (65) (63) - Interest Expense (17) (16) (16) (16)Tax 0 0 0 - Tax 0 0 0 0

Total expense (180) (204) (203) - Total expense (51) (51) (51) (51)Net Investment Income 201 197 201 - Net Investment Income 48 49 50 49

Net Realized Gain (Loss) (107) 0 0 - Net Realized Gain (Loss) 0 0 0 0Net Unrealized Gain (Loss) 176 7 0 - Net Unrealized Gain (Loss) 7 0 0 0Net income 271 204 201 - Net income 55 49 50 49

Shares O/S 237 239 241 - Shares O/S 237 238 238 239Weighted Avg.Shares O/S 223 238 240 - Weighted Avg.Shares O/S 237 238 238 239Operating EPS 0.90 0.83 0.84 - Operating EPS 0.20 0.21 0.21 0.21

GAAP EPS 1.21 0.86 0.84 - GAAP EPS 0.23 0.21 0.21 0.21DPS 0.80 0.80 0.80 - DPS 0.20 0.20 0.20 0.20

Balance sheet FY14 FY15E FY16E FY17E Ratio Analysis FY14 FY15E FY16E FY17EInvestments 3,479 3,486 3,486 - EPS growth 8.1% (8.0%) 0.9% -Cash and cash equivalents 13 13 13 - ROA 6.1% 5.4% 5.5% -


Total Debt 1,372 1,332 1,290 - BVPS 8.67 8.73 8.77 -

total Liabilities 1,590 1,564 1,536 - Dividend payout ratio 66.0% 93.2% 95.6% -Dividend Yield 9.5% 9.5% 9.5% -



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Ares Capital: Summary of FinancialsIncome Statement FY13 FY14E FY15E FY16E Cash flow statement 1Q14A 2Q14E 3Q14E 4Q14E

Interest Income 648 715 823 - Interest Income 174A 177 179 186Dividend Income 100 125 130 - Dividend Income 31A 31 31 32

Total Investment Income 882 979 1,086 - Total Investment Income 240A 239 246 253Interest Expense (171) (193) (207) - Interest Expense (52)A (46) (46) (49)Tax (14) (16) (14) - Tax (5)A (4) (4) (4)

Total expense (426) (479) (524) - Total expense (121)A (116) (119) (123)Net Investment Income 442 484 548 - Net Investment Income 113A 119 124 127

Net Realized Gain (Loss) 64 12 0 - Net Realized Gain (Loss) 12A 0 0 0Net Unrealized Gain (Loss) (6) (10) 0 - Net Unrealized Gain (Loss) (7)A (3) 0 0Net income 489 485 548 - Net income 117A 117 124 127



Balance sheet FY13 FY14E FY15E FY16E Ratio Analysis FY13 FY14E FY15E FY16EInvestments 7,633 8,497 9,297 - EPS growth 4.4% (3.5%) 5.0% -Cash and cash equivalents 150 147 147 - ROA 6.1% 5.7% 5.9% -


Total Debt 2,986 3,386 3,709 - BVPS 16.46 16.52 16.75 -

total Liabilities 3,237 3,624 3,954 - Dividend payout ratio 85.8% 98.0% 90.6% -Dividend Yield 9.4% 9.4% 9.1% -



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BlackRock Kelso Capital: Summary of FinancialsIncome Statement FY13 FY14E FY15E FY16E Cash flow statement 1Q14A 2Q14A 3Q14E 4Q14E

Interest Income 114 108 114 - Interest Income 28A 27A 26 27Dividend Income 3 2 3 - Dividend Income 1A 1A 1 1

Total Investment Income 132 124 131 - Total Investment Income 30A 34A 29 31Interest Expense (21) (23) (21) - Interest Expense (6)A (6)A (5) (6)Tax 0 0 0 - Tax 0A 0A 0 0

Total expense (84) (67) (62) - Total expense (18)A (17)A (13) (18)Net Investment Income 48 56 68 - Net Investment Income 11A 16A 16 13

Net Realized Gain (Loss) (64) 83 0 - Net Realized Gain (Loss) 34A 49A 0 0Net Unrealized Gain (Loss) 110 (57) 0 - Net Unrealized Gain (Loss) (22)A (35)A 0 0Net income 93 83 68 - Net income 23A 31A 16 13

Shares O/S 74 75 77 - Shares O/S 75A 74A 75 75Weighted Avg.Shares O/S 83 85 86 - Weighted Avg.Shares O/S 84A 84A 85 85Operating EPS 0.95 0.80 0.89 - Operating EPS 0.17A 0.23A 0.19 0.21

GAAP EPS 1.12 0.98 0.79 - GAAP EPS 0.27A 0.37A 0.19 0.15DPS 1.04 0.89 0.84 - DPS 0.26A 0.21A 0.21 0.21

Balance sheet FY13 FY14E FY15E FY16E Ratio Analysis FY13 FY14E FY15E FY16EInvestments 1,218 1,064 1,139 - EPS growth (27.1%) (16.0%) 10.9% -Cash and cash equivalents 18 78 78 - ROA 7.8% 6.7% 5.6% -


Total Debt 478 393 441 - BVPS 9.54 9.76 9.81 -


Shareholders' equity 710 736 759 -


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Fifth Street Finance Corp.: Summary of FinancialsIncome Statement FY13 FY14E FY15E FY16E Cash flow statement 1Q14A 2Q14A 3Q14E 4Q14E

Interest Income 174 256 312 - Interest Income 54A 59A 70 73Dividend Income 2 2 3 - Dividend Income 0A 0A 1 1

Total Investment Income 222 303 - - Total Investment Income 71A 72A 79 81Interest Expense (33) (50) (56) - Interest Expense (10)A (13)A (14) (14)Tax - - - - Tax - - - -

Total expense (109) (155) - - Total expense (35)A (38)A (40) (41)Net Investment Income 115 148 - - Net Investment Income 36A 34A 38 40

Net Realized Gain (Loss) (27) 2 - - Net Realized Gain (Loss) 3A (2)A 0 0Net Unrealized Gain (Loss) 27 (20) - - Net Unrealized Gain (Loss) (11)A (5)A (3) 0Net income 102 140 171 - Net income 35A 31A 38 41

Shares O/S 139 152 173 - Shares O/S 139A 139A 139 152Weighted Avg.Shares O/S 118 149 170 - Weighted Avg.Shares O/S 147A 147A 147 154Operating EPS 1.01 1.01 1.01 - Operating EPS 0.26A 0.24A 0.27 0.27

GAAP EPS 0.90 0.95 1.01 - GAAP EPS 0.24A 0.21A 0.26 0.27DPS 1.15 1.00 1.10 - DPS 0.24A 0.25A 0.25 0.26



Total Debt 560 1,410 1,525 - BVPS 9.85 9.81 9.71 -

total Liabilities 617 1,462 1,578 - Dividend payout ratio 128.2% 105.0% 108.9% -Dividend Yield 11.9% 10.4% 11.4% -



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PennantPark Investment: Summary of FinancialsIncome Statement FY13 FY14E FY15E FY16E Cash flow statement 1Q14A 2Q14A 3Q14E 4Q14E

Interest Income 118 140 152 166 Interest Income 32A 36A 36 36Dividend Income 0 0 0 0 Dividend Income 0A 0A 0 0

Total Investment Income 129 149 161 175 Total Investment Income 34A 38A 38 39Interest Expense (15) (20) (21) (23) Interest Expense (5)A (5)A (5) (5)Tax 0 0 0 0 Tax 0A 0A 0 0

Total expense 62 70 77 83 Total expense 16A 18A 18 18Net Investment Income 67 79 85 92 Net Investment Income 18A 20A 20 20

Net Realized Gain (Loss) 18 13 0 0 Net Realized Gain (Loss) 3A 3A 7 0Net Unrealized Gain (Loss) 7 0 0 0 Net Unrealized Gain (Loss) 19A 18A (12) 0Net income 92 79 85 92 Net income 39A 41A 16 20

Shares O/S 66 69 74 80 Shares O/S 67A 67A 67 69Weighted Avg.Shares O/S 66 67 72 77 Weighted Avg.Shares O/S 67A 67A 67 68Operating EPS 1.01 1.18 1.18 1.20 Operating EPS 0.27A 0.30A 0.30 0.30

GAAP EPS 1.38 1.18 1.18 1.20 GAAP EPS 0.59A 0.61A 0.24 0.30DPS 1.12 1.12 1.12 1.12 DPS 0.28A 0.28A 0.28 0.28

Balance sheet FY13 FY14E FY15E FY16E Ratio Analysis FY13 FY14E FY15E FY16EInvestments 1,078 1,295 1,415 1,535 EPS growth (6.5%) 16.5% 0.4% 1.5%Cash and cash equivalents 58 15 15 15 ROA 6.2% 6.4% 6.1% 6.1%

Total assets 1,153 1,329 1,449 1,569 ROE 9.8% 10.8% 10.5% 10.5%Debt to equity 52.2% 65.9% 65.9% 65.6%

Total Debt 364 506 554 599 BVPS 10.49 11.16 11.30 11.47

total Liabilities 456 560 609 655 Dividend payout ratio 81.0% 95.3% 94.9% 93.5%Dividend Yield 10.0% 10.0% 10.0% 10.0%

Shareholders' equity 698 768 840 914


25



Solar Capital: Summary of FinancialsIncome Statement FY13 FY14E FY15E FY16E Cash flow statement 1Q14A 2Q14E 3Q14E 4Q14E

Interest Income - - - - Interest Income - - - -Dividend Income - - - - Dividend Income - - - -

Total Investment Income 164 124 138 - Total Investment Income 33A 29 30 32Interest Expense (20) (16) (17) - Interest Expense (4)A (4) (4) (4)Tax (0) 0 0 - Tax 0A 0 0 0

Total expense - - - - Total expense - - - -Net Investment Income 85 68 71 - Net Investment Income 17A 17 17 17

Net Realized Gain (Loss) (44) (26) 0 - Net Realized Gain (Loss) (26)A 0 0 0Net Unrealized Gain (Loss) 35 22 0 - Net Unrealized Gain (Loss) 23A (0) 0 0Net income 75 64 71 - Net income 14A 17 17 17





Total Debt 50 51 158 - BVPS 22.50 22.53 22.75 -


Shareholders' equity 996 961 970 -


26



WhiteHorse Finance: Summary of FinancialsIncome Statement FY13 FY14E FY15E FY16E Cash flow statement 1Q14A 2Q14E 3Q14E 4Q14E

Interest Income 38 39 52 - Interest Income 8A 9 10 11Dividend Income - - - - Dividend Income - - - -Total Investment Income 38 39 52 - Total Investment Income 8A 9 10 11Interest Expense (5) (6) (8) - Interest Expense (1)A (1) (1) (2)Tax - - - - Tax - - - -Total expense (18) (21) (28) - Total expense (4)A (5) (6) (6)Net Investment Income 19 18 24 - Net Investment Income 4A 4 5 5Net Realized Gain (Loss) 0 0 0 - Net Realized Gain (Loss) 0A 0 0 0Net Unrealized Gain (Loss) (0) 3 0 - Net Unrealized Gain (Loss) 2A 1 0 0Net income 19 21 24 - Net income 6A 5 5 5Shares O/S 15 16 20 - Shares O/S 15A 15 16 16Weighted Avg.Shares O/S 15 16 19 - Weighted Avg.Shares O/S 15A 15 15 16Operating EPS 1.29 1.15 1.28 - Operating EPS 0.27A 0.28 0.31 0.31GAAP EPS 1.27 1.35 1.28 - GAAP EPS 0.43A 0.32 0.31 0.31DPS 1.42 1.37 1.20 - DPS 0.36A 0.36 0.36 0.30

Balance sheet FY13 FY14E FY15E FY16E Ratio Analysis FY13 FY14E FY15E FY16EInvestments 272 362 472 - EPS growth 10.5% (10.9%) 11.6% -Cash and cash equivalents 93 25 25 - ROA 5.2% 4.5% 5.1% -Total assets 374 427 537 - ROE 8.5% 7.5% 8.7% -

Debt to equity 35.2% 59.7% 63.7% -Total Debt 80 148 197 - BVPS 15.16 15.08 15.12 -total Liabilities 147 178 227 - Dividend payout ratio 111.7% 101.4% 93.6% -

Dividend Yield 10.2% 9.8% 8.6% -Shareholders' equity 227 248 310 -


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Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. For all Korea-based research analysts listed on the front cover, they also certify, as per KOFIA requirements, that their analysis was made in good faith and that the views reflect their own opinion, without undue influence or intervention.

Important Disclosures

Market Maker: JPMS makes a market in the stock of American Capital, Apollo Investment, Ares Capital, BlackRock Kelso Capital, PennantPark Investment, Solar Capital, WhiteHorse Finance.

Lead or Co-manager: J.P. Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for American Capital, Apollo Investment, Ares Capital, BlackRock Kelso Capital, Fifth Street Finance Corp., PennantPark Investment, Solar Capital within the past 12 months.

Client: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: American Capital, Apollo Investment, Ares Capital, BlackRock Kelso Capital, Fifth Street Finance Corp., PennantPark Investment, Solar Capital, WhiteHorse Finance.

Client/Investment Banking: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as investment banking clients: American Capital, Apollo Investment, Ares Capital, BlackRock Kelso Capital, Fifth Street Finance Corp., PennantPark Investment, Solar Capital.

Client/Non-Investment Banking, Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-investment-banking, securities-related: American Capital, Apollo Investment, Ares Capital, BlackRock Kelso Capital, Fifth Street Finance Corp., PennantPark Investment, Solar Capital.

Client/Non-Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-securities-related: American Capital, Apollo Investment, Ares Capital, Fifth Street Finance Corp., Solar Capital.

Investment Banking (past 12 months): J.P. Morgan received in the past 12 months compensation from investment banking American Capital, Apollo Investment, Ares Capital, BlackRock Kelso Capital, Fifth Street Finance Corp., PennantPark Investment, Solar Capital.

Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking services in the next three months from American Capital, Apollo Investment, Ares Capital, BlackRock Kelso Capital, Fifth Street Finance Corp., PennantPark Investment, Solar Capital.

Non-Investment Banking Compensation: J.P. Morgan has received compensation in the past 12 months for products or services other than investment banking from American Capital, Apollo Investment, Ares Capital, BlackRock Kelso Capital, Fifth Street Finance Corp., PennantPark Investment, Solar Capital.

MSCI: The MSCI sourced information is the exclusive property of MSCI. Without prior written permission of MSCI, this information and any other MSCI intellectual property may not be reproduced, redisseminated or used to create any financial products, including any indices. This information is provided on an 'as is' basis. The user assumes the entire risk of any use made of this information. MSCI, its affiliates and any third party involved in, or related to, computing or compiling the information hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of this information. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind. MSCI and the MSCI indexes are services marks of MSCI and its affiliates.

Company-Specific Disclosures: Important disclosures, including price charts, are available for compendium reports and all J.P. Morgan–covered companies by visiting https://jpmm.com/research/disclosures, calling 1-800-477-0406, or e-mailing [email protected] with your request. J.P. Morgan’s Strategy, Technical, and Quantitative Research teams may screen companies not covered by J.P. Morgan. For important disclosures for these companies, please call 1-800-477-0406 or e-mail [email protected].

Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s)

mailto:[email protected]


https://jpmm.com/research/disclosures

28



coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not arecommendation or a rating. In our Asia (ex-Australia) and U.K. small- and mid-cap equity research, each stock’s expected total return is compared to the expected total return of a benchmark country market index, not to those analysts’ coverage universe. If it does not appear in the Important Disclosures section of this report, the certifying analyst’s coverage universe can be found on J.P. Morgan’s research website, www.jpmorganmarkets.com.

Coverage Universe: Shane, Richard B: Ally Financial (ALLY), American Capital (ACAS), American Capital Agency Corp. (AGNC), American Express (AXP), Annaly Capital (NLY), Apollo Commercial Real Estate Finance (ARI), Apollo Investment (AINV), Apollo Residential Mortgage (AMTG), Ares Capital (ARCC), Ares Commercial Real Estate Corp. (ACRE), BlackRock Kelso Capital (BKCC), Blackstone Mortgage Trust (BXMT), Capital One (COF), Discover Financial (DFS), Essent (ESNT), Fifth Street Finance Corp. (FSC), Ladder Capital (LADR), MFA Financial (MFA), PennantPark Investment (PNNT), PennyMac Financial Services (PFSI), Santander Consumer (SC) (SC), Solar Capital (SLRC), TAL International (TAL), TPG Specialty Lending (TSLX), Two Harbors (TWO), Western Asset Mortgage (WMC), WhiteHorse Finance (WHF)

J.P. Morgan Equity Research Ratings Distribution, as of June 30, 2014

Overweight(buy)

Neutral(hold)

Underweight(sell)

J.P. Morgan Global Equity Research Coverage 45% 43% 11%IB clients* 55% 49% 34%

JPMS Equity Research Coverage 46% 47% 7%IB clients* 75% 66% 54%

*Percentage of investment banking clients in each rating category.For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category. Please note that stocks with an NR designation are not included in the table above.

Equity Valuation and Risks: For valuation methodology and risks associated with covered companies or price targets for covered companies, please see the most recent company-specific research report at http://www.jpmorganmarkets.com, contact the primary analyst or your J.P. Morgan representative, or email [email protected].

Equity Analysts' Compensation: The equity research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues.

Other Disclosures

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All research reports made available to clients are simultaneously available on our client website, J.P. Morgan Markets. Not all research content is redistributed, e-mailed or made available to third-party aggregators. For all research reports available on a particular stock, please contact your sales representative.

Options related research: If the information contained herein regards options related research, such information is available only to persons who have received the proper option risk disclosure documents. For a copy of the Option Clearing Corporation's Characteristics and Risks of Standardized Options, please contact your J.P. Morgan Representative or visit the OCC's website at http://www.optionsclearing.com/publications/risks/riskstoc.pdf

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http://www.optionsclearing.com/publications/risks/riskstoc.pdf


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Mumbai – 400098, is a member of the National Stock Exchange of India Limited (SEBI Registration Number - INB 230675231/INF 230675231/INE 230675231) and Bombay Stock Exchange Limited (SEBI Registration Number - INB 010675237/INF 010675237) and is regulated by Securities and Exchange Board of India. Telephone: 91-22-6157 3000, Facsimile: 91-22-6157 3990 and Website: www.jpmipl.com. For non local research reports, this material is not distributed in India by J.P. Morgan India Private Limited. Thailand: This material is issued and distributed in Thailand by JPMorgan Securities (Thailand) Ltd., which is a member of the Stock Exchange of Thailand and is regulated by the Ministry of Finance and the Securities and Exchange Commission and its registered address is 3rd Floor, 20 North Sathorn Road, Silom, Bangrak, Bangkok 10500. Indonesia: PT J.P. Morgan Securities Indonesia is a member of the Indonesia Stock Exchange and is regulated by the OJK a.k.a. BAPEPAM LK. Philippines: J.P. Morgan Securities Philippines Inc. is a Trading Participant of the Philippine Stock Exchange and a member of the Securities Clearing Corporation of the Philippines and the Securities Investor Protection Fund. It is regulated by the Securities and Exchange Commission. Brazil: Banco J.P. Morgan S.A. is regulated by the Comissao de Valores Mobiliarios (CVM) and by the Central Bank of Brazil. Mexico: J.P. Morgan Casa de Bolsa, S.A. de C.V., J.P. Morgan Grupo Financiero is a member of the Mexican Stock Exchange and authorized to act as a broker dealer by the National Banking and Securities Exchange Commission. Singapore: This material is issued and distributed in Singapore by or through J.P. Morgan Securities Singapore Private Limited (JPMSS) [MCI (P) 199/03/2014 and Co. Reg. No.: 199405335R] which is a member of the Singapore Exchange Securities Trading Limited and is regulated by the Monetary Authority of Singapore (MAS) and/or JPMorgan Chase Bank, N.A., Singapore branch (JPMCB Singapore) which is regulated by the MAS. This material is provided in Singapore only to accredited investors, expert investors and institutional investors, as defined in Section 4A of the Securities and Futures Act, Cap. 289. Recipients of this document are to contact JPMSS or JPMCB Singapore in respect of any matters arising from, or in connection with, the document. Japan: JPMorgan Securities Japan Co., Ltd. is regulated by the Financial Services Agency in Japan. Malaysia: This material is issued and distributed in Malaysia by JPMorgan Securities (Malaysia) Sdn Bhd (18146-X) which is a Participating Organization of Bursa Malaysia Berhad and a holder of Capital Markets Services License issued by the Securities Commission in Malaysia. Pakistan: J. P. Morgan Pakistan Broking (Pvt.) Ltd is a member of the Karachi Stock Exchange and regulated by the Securities and Exchange Commission of Pakistan. Saudi Arabia: J.P. Morgan Saudi Arabia Ltd. is authorized by the Capital Market Authority of the Kingdom of Saudi Arabia (CMA) to carry out dealing as an agent, arranging, advising and custody, with respect to securities business under licence number 35-07079 and its registered address is at 8th Floor, Al-Faisaliyah Tower, King Fahad Road, P.O. Box 51907, Riyadh 11553, Kingdom of Saudi Arabia. Dubai: JPMorgan Chase Bank, N.A., Dubai Branch is regulated by the Dubai Financial Services Authority (DFSA) and its registered address is Dubai International Financial Centre - Building 3, Level 7, PO Box 506551, Dubai, UAE.

Country and Region Specific Disclosures U.K. and European Economic Area (EEA): Unless specified to the contrary, issued and approved for distribution in the U.K. and the EEA by JPMS plc. Investment research issued by JPMS plc has been prepared in accordance with JPMS plc's policies for managing conflicts of interest arising as a result of publication and distribution of investment research. Many European regulators require a firm to establish, implement and maintain such a policy. This report has been issued in the U.K. only to persons of a kind described in Article 19 (5), 38, 47 and 49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (all such persons being referred to as "relevant persons"). This document must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this document relates is only available to relevant persons and will be engaged in only with relevant persons. In other EEA countries, the report has been issued to persons regarded as professional investors (or equivalent) in their home jurisdiction. Australia: This material is issued and distributed by JPMSAL in Australia to "wholesale clients" only. This material does not take into account the specific investment objectives, financial situation or particular needs of the recipient. The recipient of this material must not distribute it to any third party or outside Australia without the prior written consent of JPMSAL. For the purposes of this paragraph the term "wholesale client" has the meaning given in section 761G of the Corporations Act 2001. Germany: This material is distributed in Germany by J.P. Morgan Securities plc, Frankfurt Branch and J.P.Morgan Chase Bank, N.A., Frankfurt Branch which are regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht. Hong Kong: The 1% ownership disclosure as of the previous month end satisfies the requirements under Paragraph 16.5(a) of the Hong Kong Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission. (For research published within the first ten days of the month, the disclosure may be based on the month end data from two months prior.) J.P. Morgan Broking (Hong Kong) Limited is the liquidity provider/market maker for derivative warrants, callable bull bear contracts and stock options listed on the Stock Exchange of Hong Kong Limited. An updated list can be found on HKEx website: http://www.hkex.com.hk. Japan: There is a risk that a loss may occur due to a change in the price of the shares in the case of share trading, and that a loss may occur due to the exchange rate in the case of foreign share trading. In the case of share trading, JPMorgan Securities Japan Co., Ltd., will be receiving a brokerage fee and consumption tax (shouhizei) calculated by multiplying the executed price by the commission rate which was individually agreed between JPMorgan Securities Japan Co., Ltd., and the customer in advance. Financial Instruments Firms: JPMorgan Securities Japan Co., Ltd., Kanto Local Finance Bureau (kinsho) No. 82 Participating Association / Japan Securities Dealers Association, The Financial Futures Association of Japan, Type II Financial Instruments Firms Association and Japan Investment Advisers Association. Korea: This report may have been edited or contributed to from time to time by affiliates of J.P. Morgan Securities (Far East) Ltd, Seoul Branch. Singapore: JPMSS and/or its affiliates may have a holding in any of the securities discussed in this report; for securities where the holding is 1% or greater, the specific holding is disclosed in the Important Disclosures section above. 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Any offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively, pursuant to an exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made. The information contained herein is under no circumstances to be construed as investment advice in any province or territory of Canada and is not tailored to the needs of the recipient. To the extent that the information contained herein references securities of an issuer incorporated, formed or created under the laws of Canada or a province or territory of Canada, any trades in such securities must be conducted through a dealer registered in Canada. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed judgment upon these materials, the information contained herein or the merits of the securities described herein, and any representation to the contrary is an offence. Dubai: This report has been issued to persons regarded as professional clients as defined under the DFSA rules. Brazil: Ombudsman J.P. Morgan: 0800-7700847 / [email protected].

General: Additional information is available upon request. Information has been obtained from sources believed to be reliable but JPMorgan Chase & Co. or its affiliates and/or subsidiaries (collectively J.P. Morgan) do not warrant its completeness or accuracy except with respect to any disclosures relative to

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JPMS and/or its affiliates and the analyst's involvement with the issuer that is the subject of the research. All pricing is as of the close of market for the securities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its own independent decisions regarding any securities or financial instruments mentioned herein. JPMS distributes in the U.S. research published by non-U.S. affiliates and accepts responsibility for its contents. Periodic updates may be provided on companies/industries based on company specific developments or announcements, market conditions or any other publicly available information. Clients should contact analysts and execute transactions through a J.P. Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise.

"Other Disclosures" last revised June 21, 2014.

Copyright 2014 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of J.P. Morgan. #$J&098$#*P

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