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BDCS vs. ETF Alternatives
The ETRACS Linked to the Wells Fargo Business Development Company Index due April 26, 2041 is designed to track an investment in the Wells Fargo Business Development Company Index ("Index"), and may pay a variable quarterly coupon linked to the cash distributions associated with the underlying BDC constituents, less investor fees. Note that if the BDCs do not make distributions or those distributions do not overcome the investor fees, then investors will not receive any coupons.
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Tuesday, Mar 43:30 PM
Tuesday, Mar 43:30 PM| 16 Comments
- Unless the SEC changes the sector's fee-reporting standards by May 15, Russell told clients last night it will remove BDCs from its indexes during its June reconstitution.
- Earlier calling such a move somewhat of a nonevent, Wells' team sounds like it's singing a different tune now. They believe there's a chance the SEC does change the rules, because not doing so would "likely drive sophisticated institutional capital away from the space." More: "We believe this is the very capital that is adept on calling out subpar BDCs. … In our view, a healthy and sophisticated public market is needed to ensure that only those deserving BDCs are the ones to receive the capital."
- It's no little deal as an estimated 8% of all BDC shares are owned by funds benchmarked to the Russell 2000 index.
- Index maker CRSP, whose benchmarks are tracked by Vanguard, already bars BDCs, calling them "essentially publicly traded private investment vehicles ... [we] excluded BDCs from the get-go, recognizing that they really don’t represent equity securities of the type that are trying to be captured in equity indexes."
- In a big green down for the markets, most of the BDC sector is in the red. Prospect (PSEC -0.5%), Fifth Street (FSC -1.5%), Ares(ARCC -0.9%), BlackRock Kelso (BKCC -1.6%), Medley (MCC -0.9%) THL (TCPC -1.6%), NGP (NGPC -2.9%), New Mountain (NMFC -1.6%), PennantPark (PNNT -0.5%), Triangle (TCAP -0.7%).
- ETFs: BDCL, BDCS, BIZD
Tuesday, Mar 47:54 AM
Tuesday, Mar 47:54 AM| 8 Comments
- Declines in the sector in response to Russell's decision to exclude BDCs from its indices are due to technical, not fundamental reasons, says analyst Jonathan Bock. "We believe select BDCs offer compelling return opportunities in this low rate, low credit loss environment. In our view, those risk/return elements are unaffected by whether or not the BDCs are included in Russell Indices."
- Among Wells' highest rated names: American Capital (ACAS), Ares Capital (ARCC), Golub Capital (GBDC), Medley Capital (MCC), and TCP Capital (TCPC).
- Related ETFs: BDCL, BDCS, BIZD
Wednesday, Feb 261:16 PM
Wednesday, Feb 261:16 PM| 14 Comments
- WIth business development companies getting the boot from S&P indices, will the Russell follow suit? It's a significant issue as investors are far more heavily invested in BDCs though the Russell indices than through S&P, writes Brendan Conway. He notes ownership of BDCs by Russell-tracking index funds are as high as 38 days worth of trading volume, and Wells Fargo estimates there are 24 BDCs where 10 or more days of average volume would be required to unload them.
- Wells, however, does not see Russell following S&P's lead, with item #1 being Russell's desire to "represent small cap reality." "Russell Indices receive acclaim because they are willing to provide investors access to the true investable small cap universe. To the extent BDCs are excluded, this would deprive investors the opportunity to invest in what has become a very large/growing industry."
- The following list is those BDCs with 10 or more days of average volume in index funds tracking Russell indices.
- NGPC 38.23 days of volume, CSWC 29 days, SCM 23.5, FDUS 20.7, GARS 20, MVC 19.7, SUNS 18, WHF 17.8, SLRC 17.2, CPTA 16, MCGC 15.1, BKCC 14.9, TCRD 14, HRZN 14, TCAP 13.9, PNNT 13.3, HTGC 12.6, TICC 12.6, GLAD, 12.4, GBDC 12.3, KCAP 12.2, TAXI 11.8, MAIN 11.4, NMFC 9.98.
- Related ETFs: BDCL, BDCS, BIZD
- Other major names - no doubt included in the indices, but whose holdings are less than 10 days of average trading volume: PSEC, FSC, ARCC, AINV, MCC, HTGC, TCPC, FULL, GBDC
Tuesday, Feb 2512:20 PM
Tuesday, Feb 2512:20 PM| 40 Comments
- "After consulting with clients concerned with certain reporting requirements, expenses, and investment restrictions relating to business development companies (BDCs), S&P Dow Jones has decided to remove all identified BDCs from its U.S. Indices.
- Press release
- BDC ETFs: BDCL, BDCS, BIZD
- Earlier: Prospect Capital (PSEC -2.7%) is removed from the S&P 600 SmallCap Index and Apollo Investment (AINV -7.3%) is removed from the S&P 400 MidCap Index.
- Prospect's market cap is $3.4B, Apollo's $1.9B. Other BDCs with market caps over $1B: Fifth Street (FSC -0.8%), Ares Capital (ARCC -1.5%), American Capital (ACAS -1.7%), Main Street (MAIN -1.7%), Hercules Technology (HTGC -2%). Close enough to $1B for an argument: Solar Capital (SLRC -1.8%) and Golub Capital (GBDC -0.2%).
Tuesday, Feb 2510:35 AM
Tuesday, Feb 2510:35 AM| 41 Comments
- Amid the dropping of Prospect Capital (PSEC -3%) from the S&P SmallCap 600 and Apollo Investment from the S&P MidCap 400, the business development sector is reeling a bit.
- Ares Capital (ARCC -1.5%), Main Street (MAIN -1.8%), Blackrock Kelso (BKCC -3.3%), Triangle (TCAP -2.2%), TICC Capital (TICC -1.2%), PennantPark (PNNT -2.7%), THL Credit (TCRD -1.2%), Hercules Technology (HTGC -2.6%).
- BDC ETFs: BDCL, BDCS, BIZD
- See also: AINV with 12M share secondary
Monday, Feb 243:35 PM
Monday, Feb 243:35 PM| 10 Comments
- Comparing metrics for the two of the more popular dividend strategies - the SPDR S&P Dividend ETF (SDY +0.4%) and the Vanguard Dividend Appreciation ETF (VIG +0.7%) - against the two largest large-cap value ETFs - the Russell 1000 Value ETF (IWD +0.9%) and Vanguard's Value ETF (VTV +0.7%) - Larry Swedroe finds valuations quite stretched for the dividend players.
- The SDY sports a P/E ratio of 17.2x, price/book ratio of 2.5x, and price/cash flow ratio of 10.5x, with the VIG showing similar. The value ETFs have P/E below 14x, price/books below 2x, and price/cash flow below 6x.
- The popularity of dividends has led to a pleasing rise in the values of the stocks, but has thus reduced expected future returns, reminds Swedroe. And for taxable accounts, it's even worse as dividends are less tax-efficient than capital gains.
- Dividend ETFs: DVY, VIG, AMLP, SDY, VYM, AMJ, BDCL, SCHD, HDV, MLPL, YMLP, KBWD, BDCS, DES, PEY, MLPI, SPHD, DIV, DLN, DHS, MLPA, ENY, DTD, DGRW, DON, MLPN, FDL, NOBL, FVD, PFM, EMLP, MLPS, BIZD, MLPG, MLPY, MLPX, MLPJ, SDYL, AMU, YMLI, DVYL, ATMP, DGRS, ZMLP, RDIV, RDVY, MLPW, IMLP, QDYN, ENFR, QDF, QDEF, MLPC
Wednesday, Nov 272013, 2:15 PM
Wednesday, Nov 272013, 2:15 PM| 1 Comment
- "It's been extremely frustrating," says Fifth Street Finance (FSC -1.4%) CEO Len Tannenbaum on the earnings call (transcript), as the company has struggled executing on its five-point plan and yesterday cut the dividend to be more in line with reduced earnings.
- He blames this FQ4's particularly weak result on prepayments being front-loaded coupled with a "lousy" origination number of $120M as several deal closing slipped into FQ1. "The board looked at $0.24 (NII) versus our dividend level, and said, all right, we just have not earned our dividend for several quarters and we have to put it at least temporarily in line with the current earnings level."
- Responding to a question about whether the board will consider cutting the fee structure in light of the company's move into first lien, safer, lower-yielding assets, President Bernard Berman dances around a bit, but does promise an improvement in general and administrative expenses next year.
- One thing investors don't have to worry about in the short-term is a stock offering as Fifth Street - given the tough deal environment - is sitting on plenty of excess capital (there was a secondary in September).
- Company specific? Thus far, the rest of the BDC sector is shrugging off FSC's weak results.
- BDC ETFs: BDCL, BDCS, BIZD
Thursday, Aug 152013, 11:12 AM
Thursday, Aug 152013, 11:12 AM| 13 Comments
- Anything paying income is again being particularly hard hit by the rise in Treasury yields (the 10-year now at a 2-year high of 2.8%).
- Selections in mREITs (REM -2.1%), (MORT -1.9%) include RAIT Financial Trust (RAS -4.1%) - whose IRT had an ill-timed IPO yesterday and Ellington Residential (EARN -4.8%) - the market not caring about reasonable Q2 performance, a hefty discount to book, and the launch of a repurchase program. Other mREITs: CYS Investments (CYS -3.6%), Apollo (AMTG -3%), Newcastle (NCT -5%), Invesco (IVR -2.7%), Arlington Asset (AI -1.2%). A leveraged ETF play: MORL.
- Hanging in there relatively well are the BDCs: Fifth Street (FSC -1.3%), Triangle (TCAP -1%), MCG (MCGC -1.2%), Hercules (HTGC -1.2%), Ares (ARCC -0.3%).
- BDC ETFs: BDCS, BDCL, BIZD.
- In emerging markets fixed income, a trader takes note of EDD, a closed-end fund now trading at more than a 15% discount to NAV.
- Emerging market bond ETFs: EMB, LEMB, PCY, EMLC, ELD, PFEM, EBND, VWOB.
Wednesday, Aug 72013, 10:24 AM
Wednesday, Aug 72013, 10:24 AM| 1 Comment
- Ares Capital (ARCC -2.5%) slides after KBW removes its Buy rating on the stock a day after Q2 earnings were reported.
- Of note is the 90 basis point Y/Y decline in average yield on the company's debt investments to 10.8% - a result, says management (transcript), of a focus on lower-yielding senior secured debt, lower yields on new debt in general, and the repricing of some loans. The yield on the total portfolio (which includes equity investments) fell a more moderate 60 bps to 9.8%.
- Earnings presentation slides.
- Other BDCs of note: Triangle (TCAP -1.9%), TICC (TICC -1.3%), Prospect (PSEC -1.2%).
- Related ETFs: (BDCS -1.3%), (BDCL -2.5%), (BIZD -1.6%).
Thursday, Jul 112013, 3:32 PMOutperforming in the BDC (BDCS -0.9%) sector today is American Capital (ACAS +4.1%) - the only one among the larger players not paying a dividend. Instead, an aggressive buyback program was very active during the stock's roughly 20% decline over the last 2 months, the company purchasing about 3% of the float in Q2 through June 26. |Thursday, Jul 112013, 3:32 PM| 3 Comments
Friday, Jun 212013, 12:13 PMTo find alpha in the BDC sector (BDCS), look for those companies with higher-than-average dividend growth, says BB&T's Vernon Plack. He still likes previous favorite Ares Capital (ARCC -0.8%), but his top 3 picks now are Fidus (FDUS -0.6%), Hercules Technology (HTGC +0.3%), and Solar Capital (SLRC -0.4%). Fidus - which invests at the low end of the middle-market space - has the potential for a 50% higher dividend, a 12.5% yield based on today's price. |Friday, Jun 212013, 12:13 PM| 1 Comment
Thursday, Jun 202013, 4:45 PMThe selloff in BDCs (BDCS -1.9%) in response to higher rates should not be "uniform across the sector," says Fifth Street Finance (FSC -1.9%) in its June 2013 newsletter. As of March 31, 74% of FSC investments were floating and 90% of capital was not tied to rate movements. A small bump in rates should make the portfolio more profitable, but - because floors will be breached - a large rise would "dramatically" boost profits. Other BDCs today: Prospect - which claims to be in the same position as FSC - (PSEC -0.4%), Ares (ARCC -1.7%), BlackRock Kelso (BKCC -1.9%), Main Street (MAIN -3.2%), Solar (SLRC -1.4%), TICC (TICC -1.8%). |Thursday, Jun 202013, 4:45 PM| 10 Comments
Wednesday, Jun 192013, 11:19 AMTriangle Capital (TCAP -1.1%) updates its investor presentation as its annual analyst and investor meeting gets underway. Why TCAP as opposed to other BDCs? Internally managed BDCs like TCAP, MAIN, and HTGC have lower relative G&A expenses and deliver better returns to owners. Why BDCs (BDCS) over regional banks? Fewer banks with far more conservative capital structures are leaving plenty of market share for BDCs to pick up. |Wednesday, Jun 192013, 11:19 AM| 2 Comments
Friday, Jun 72013, 10:43 AMTreasury prices are sharply lower, but high yield (HYG +0.6%) is enjoying a nice bounce after a rough few weeks. The move is translating into higher prices for BDCs (BDCS +1.5%) - whose assets are somewhat comparable to junk debt. Leading: Prospect (PSEC +1.2%), Main Street (MAIN +2.2%), Triangle (TCAP +1%), MCG (MCGC +1.6%), American Capital (ACAS +1.7%), Fifth Street (FSC +1.1%), and Golub (GBDC +0.9%). As SA's Alberto Alfonso points out, American Capital - for one - can take advantage of recent declines to buy back even more shares at well below book value. |Friday, Jun 72013, 10:43 AM| 1 Comment
Tuesday, Jun 42013, 1:43 PMMain Street Capital (MAIN -4.2%) continues for a 2nd day to bear the brunt of the selling in the BDC sector (BDCS -0.7%). The company's just-published investor day presentation is typical conference stuff - showing how the company is different (and superior) to its sector brethren, explaining the opportunities in lower and middle-market lending, and including several case studies. Also notably lower: MCG Capital (MCGC -1.6%), Prospect (PSEC -1.3%), and Hercules (HTGC -1%). |Tuesday, Jun 42013, 1:43 PM| 16 Comments
Monday, Jun 32013, 11:52 AMBusiness development companies (BDCS -1.1%) see some selling as higher interest rates threaten to offer at least minor competition to their fat dividends. The drop in junk bond prices - a decent proxy for the assets on their books - isn't helping either. Leading on the downside today: Main Street (MAIN -4.5%), American Capital (ACAS -2.4%), Prospect Capital (PSEC -1.4%), Ares Capital (ARCC -1.1%), Blackrock Kelso (BKCC -1.1%). |Monday, Jun 32013, 11:52 AM| 6 Comments