Hailing from the alternative asset universe, business development companies (BDCs) have increased in popularity among investors for one big reason: Tantalizing dividend yields. However, the specter of rising interest rates has been a thorn in the side of BDCs and the Market Vectors BDC Income ETF (NYSEArca: BIZD) this year.
Although the Federal Reserve has yet to raise interest rates and some market observers believe that will not happen until late in the first quarter of 2016, BIZD is off 10% year-to-date. BDCs offer attractive income opportunities since they are required to pay out 90% of income in form of dividends, a structure similar to what income investors find with real estate investment trusts (REITs).
The companies essentially help fund small $5 million to $100 million businesses. Ever since the financial crisis, regulators have clamped down on traditional lenders and made it harder for businesses to access public capital, which has forced smaller business to take loans from BDCs. [BDC ETFs for a Growing Economy, Attractive Yields]
There is some good for BIZD and some of its smaller holdings: Coming debut maturities are not as worrisome as previously thought.
“In our opinion, the convertible debt maturities in 2016 will allow the BDCs the ability to get rid of some of the highest cost debt on their balance sheets, and we believe there are multiple options to benefit from these maturities. We believe they will have no problem replacing this debt and that it should result in even lower interest expense costs,” said Keefe, Bruyette & Woods in a note posted by Amey Stone of Barron’s.