I am posting the following to my InstaBlog - and not making it an article - because it is an out of consensus opinion that I am not fully comfortable posting. It is hyper negative about a fellow SA writer - which makes me uncomfortable. It is based on a less than complete set of data. And I am not that sure that I am right. But . . . it contains important information you should know. So here goes
The following was posted by me on the BDC message board at Investor Village.
rpl2451 asked "Is this author wrong?" Who wrote that PSEC will benefit from a rising rate environment. The link to the article: seekingalpha.com/article/1897311-prospect-capital-this-dividend-machine-keeps-on-churning
I am tempted to write "of course she is wrong" - but I really should write "I strongly suspect she is wrong" - because the article includes too much "I've drunk the Kool-aid" language that is not backed up by the data.
BDCs put out the propaganda that rising rates will help them when the have variable rate loans. But long term rates went up in 2013. The ten year ended 2012 at 1.76% - and it now is in the 2.8s. But what has happened to the "weighted average yield" numbers for good senior secured floating rate loan BDCs?
Show me one interest rate sensitivity scenario (the kind in the 10-K's and 10-Q's) where a BDC with a high variable rate portfolio has increases in NII when rates rise under 100 bps. And remember - those projection are based on changes in the 90 day LIBOR. And - Who is saying that short-term rates are going up?
The forecast is for long term rates to rise. The Fed is projected to keep short term rates low.
The data from bankrate.com - the current 90 day LIBOR rate is 0.24%. It was 0.24% last month. It was 0.31% this time last year.
The data from a few 10-Q's and 10-K's:
AINV reports in their Q3-13 10-Q that a 100 basis point increase in interest rates would decrease their net investment income by $0.747 million or $0.003/share while a 200 basis point increase in rates would increase income by $11.450 million or $0.051/share.
FSC reports in their 10-K that a 100 basis point increase in interest rates would increase interest income by $1.3 million while increasing interest expense by $1.9 million - while a 200 bps increase would increase interest income by $9.8 million while increasing interest expense by $3.8 million.
GLAD reported in their 10-K that a 100 basis point increase in interest rates would increase interest income by $0.011 million while it would increase interest expense by $0.469 million - while a 200 bps increase would increase interest income by $0.698 million while increasing interest expense by $0.938 million.
GAIN reported in their 10-K of 5-14-13, that if interest rates fell 20 basis points, the change in interest income would be flat and interest expenses would fall $0.063 million - for a positive effect of $0.063 million. If interest rates were to rise 100 bps. - then interest income would rise $0.036 million while interest expenses would rise $0.310 million - for a negative impact of $0.274 million. If interest rates were to rise 200 bps. - then interest income would rise $0.365 million while interest expenses would rise $0.620 million - for a negative impact of $0.255 million.
Assuming that the consolidated statement of financial condition as of September 30, 2013 were to remain constant and that GBDC took no actions to alter our existing interest rate sensitivity, the following table shows the annualized impact of hypothetical base rate changes in interest rates. The data is in thousands.
|Change in interest rates||Increase (decrease) in interest income||Increase (decrease) in interest expense||Net increase (decrease) in investment income|
|Down 25 basis points||$ (26)||$ (582)||$ 556|
|Up 100 basis points||230||2,326||(2,096)|
|Up 200 basis points||9,101||4,740||4,361|
|Up 300 basis points||18,580||7,154||11,426|
Now let's review
The 90 day LIBOR went from 31 bps to 24 bps so far in 2013 - a change of 7 bps
The data put out by the BDCs show the effect of changes in 100 bps increments. (Data in such increments looks almost meaningless to me).
The effect of 100 bps or less is mostly negative on NII
Everything I posted in this message was on the change in LIBOR. One should remember - it is my out of consensus opinion that the change in the LIBOR is not "the big thing". But it is the change that everyone is talking about. And even the data "on the change everyone is talking about" does not support the case that BDCs will benefit from an increase in the 90 day LIBOR that is realistic - say a change of plus 20 bps.
And that is why I strongly believe that the author of the article rpl2451 referred to "has drunk the Kool-aid". The author is parroting the BDC propaganda.
-------- end of my message board post -------
The lesson you should take from this - be skeptical about claims that are not fully backed by the data. If an article lacks data - be skeptical about the due diligence that went into the article.