Business Development Companies (BDCs) were created as a result of the Investment Company Act of 1940. They are publicly traded securities, regulated by the SEC and similar to REITs in that they have a pass-through tax structure. As such, they pay little or no corporate income tax, provided that they distribute most of their income as dividends to investors and meet other requirements.
BDCs have grown in popularity recently as they boast relatively high yields, allow investments by the general public and use far less leverage than other financial instruments.
According to the Nasdaq's short interest data published today (4/24/12), the following are the most shorted BDCs, based on the number of shares currently held short divided by total shares outstanding, along with the estimated number of days to cover:
% of Shares
(in mil. of shares)
1. Fifth Street Finance
2. Prospect Capital
3. Apollo Investment Corp.
4. TICC Capital
5. Solar Capital Ltd.
6. Kohlberg Capital
7. Triangle Capital
8. PennantPark Investments
9. Gladstone Capital
10. MVC Capital
The days to cover statistic is defined as the number of shares sold short divided by average daily volume. As a reminder, short interest may be useful in judging investor sentiment for a particular stock from month to month, and as a comparison with other shorted stocks.
This indicator is useful for both bears and bulls - bulls may consider a high short interest ratio a positive, since eventually there would be upward pressure on the stock's price as short sellers cover their short positions. This upward pressure can become very strong if, for instance, a company announces some positive news and forces a number of short sellers to cover at the same time.
Short Interest Trends: The most noteworthy changes in short interest in the past several months are shown below:
- Apollo Investment Corp.'s short interest jumped by 26% in just 2 weeks to hit 7.87 million shares. Of course this is well below its 52-week high of 12.36 million set on 9/15/2011.
- Fifth Street Finance and Prospect Capital both are registering short interest that is 10%-15% lower compared to beginning of the year.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.