Business development companies (BDCs) and the Market Vectors BDC Income ETF (NYSEArca: BIZD) have earned some much needed relief as the Federal Reserve has dithered on raising interest rates, good news for income-generating, rate-sensitive asset classes such as BDCs.
And while third-quarter earnings for BDCs are not expected to be overly impressive, the fourth quarter could be the right time to revisit this asset class in the eyes of some sell-side analysts.
“Third quarter earnings for business development companies, public firms that make loans to private companies, are unlikely to be that exciting when the flood of reports kicks in in early November. That’s partly because there were fewer loan originations completed as companies postponed deals amid turbulent market conditions finds SunTrust Robinson Humphrey in a new report on the industry,” reports Amey Stone for Barron’s.
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]
Last week, Barron’s published an article highlighting diminishing risk in terms of coming BDC debt maturities.
Since the debt is typically senior secured and set to float with interest rate benchmarks, there is diminished rate risk. When the Fed raises rates, BDC loan interest rates pegged to the London Interbank Offered Rate, or LIBOR, will also rise.
Business development companies are required to disclose so-called acquired fund fees and expenses, which are a type of business expense and not considered “fees” in the way fund investors are familiar with. [Making Sense of Acquired Fund Fees in BDC ETFs]
“The fourth quarter should show much improvement, writes analyst Douglas Mewhirter on Wednesday. New deals are closing with better terms for lenders and yields should be rising over the next year,” according to Barron’s.
Market Vectors BDC Income ETF
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.