67 WALL STREET, New York – June 25, 2014 – The Wall Street Transcript has just published its Business Development Companies Report offering a timely review of the sector to serious investors and industry executives. This special feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.
Topics covered: BDC Risk/Reward Profile – Business Development Companies Historical Overview – Internally and Externally Managed BDCs – BDC Dividend Growth – BDC Returns – Strong BDC Fundamentals – BDC and Bank Differences – Competitive Outlook for BDCs
Companies include: American Capital, Ltd. (ACAS), Goldman Sachs Group Inc. (GS), The Blackstone Group (BX), General Electric Co. (GE), Triangle Capital Corporation (TCAP) and many others.
In the following excerpt from the Business Development Companies Report, an expert analyst discusses the outlook for the sector for investors:
TWST: What is your coverage in the BDC space?
Mr. Ward: Greg Mason and I co-cover the sector, and we cover 30 BDCs. I started covering this space in 2000, when there were only a few BDCs; the two well-known names were Allied Capital and American Capital Strategies (ACAS). American Capital is still around, and Allied Capital was acquired by Ares (ARCC) in 2010. So we have a long history in this space.
Greg and I have been together since 2006 with this team approach, and we are committed to covering the space. We used to do some mortgage REITs, some credit card companies and things like that, but as the BDC space has grown it has enabled us to solely focus on this sector.
TWST: What are the macro trends you are seeing for BDCs right now, and what are some of the sector trends?
Mr. Ward: From a larger macro trend standpoint, the BDCs have the wind at their back. If you just step back and look at the broader lending picture, the BDCs are entities that can provide capital to borrowers in a time where, due to federal regulation, the banks are having difficulty providing capital to all segments of the borrowing population. Banks are still very good at providing capital in the senior, the asset-based, but that’s not really the focus of BDCs anyway.
If we step back and look the structure of BDCs, a BDC can only have 1:1 debt to equity. Therefore you really can’t do asset-based, top-of-the-capital-structure loans, because those can be safely leveraged more than 1:1, and so somebody else is going to have a cost advantage to fund those loans. Banks do these assets and put eight to 10 times leverage on those loans through their deposit franchise. The BDC can’t compete with that.
The BDCs have always and continue to provide cash-flow-based loans, where they look at the underlying company and say, “we’re not going to give you a loan based on your plant, property and equipment. We are going to look at your business and ask, what is the ability to service the debt over the next five to 10 years?” They underwrite the loan based on the expected cash flows. Due to less asset coverage of the loan, if things go poorly the BDC loans are more at risk. So we often tell people that the BDCs take more credit risk, while banks take more interest rate risk.
From a credit-quality standpoint, the BDCs have proven to be very good underwriters. If you look at the credit performance of the BDCs since 2006, with assets that were originated in 2004, 2005 and 2006, and you take them through the Great Recession, how did they do? Just looking at principal outlays, not including the interest or fee income, the BDCs have a loss rate of about 65 basis points, 0.65% annually, which is very good. I think it compares very favorably to a bank CI lending portfolio, but clearly the BDCs are getting a lot more yield than a traditional bank CI portfolio. So I think they are in a very good position going forward because they do a good job of underwriting higher-yielding loans, and you have banks backing away from that category.
TWST: As you mentioned, we went from two original BDCs to more than 30 now. Are we continuing to see new entrants in the space?
For more of this interview and many others visit the Wall Street Transcript – a unique service for investors and industry researchers – providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.
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