Business development companies had a slow start in 2016, but the third quarter saw deal flow increase, which was especially positive for BDCs with capital to deploy. Analysts say BDCs are currently trading around 95% of book value, which is below historical averages, and which could prove enticing to some investors. Analysts, however, say there are reasons to be cautious with the space, saying competition in the middle market from direct lending has increased. If banking regulation decreases, banks could move also into the middle market, further increasing competition for BDCs.
Some analysts are concerned about the credit cycle, saying a negative turn is due, though others say they see no evidence in the data to make those assertions. Some even say credit will likely continue to improve in 2017, as yields on underlying loans appear to have stabilized. Yields on first liens have been trending upward over the last six months, while yields on second liens have trended up slightly.
Analysts discuss interest rates, saying that if short-term rates rise, this might be good for BDCs, because they have floating-rate loans. But if the long-term rises and the short-term stays low, that wouldn’t be as positive for this space. Currently, dividend yields in the BDC space have come down from 12% to 13% levels to an average of 10%. Some BDCs could benefit from higher rates because they have spent years pushing the asset side of the portfolio toward floating-rate loans, which analysts say it means BDCs have outperformed relative to REITs or utilities indices.
Analysts also discuss government regulation, saying less regulation could be good for BDCs. If government spending increases, that could also be positive for BDCs as interest rates could increase. They also say there is potential legislation in Congress which would let BDCs increase their leverage.
Full report available here.
Interview Highlights: Casey Alexander of Compass Point Research & Trading on Business Development Companies
December 13, 2016
Interview Highlights: Mitchel Penn of Janney Montgomery Scott LLC on Business Development Companies
December 14, 2016
Interview Highlights: Ryan Lynch of Keefe, Bruyette & Woods on Business Development Companies
December 15, 2016
Interview Highlights: Kyle Joseph of Jefferies & Company on Business Development Companies
December 16, 2016
Report Overview: Transportation & Logistics
August 02, 2016
