Plenty of exchange traded funds are being hampered by falling oil prices and with little respite seen for crude in the near-term, investors are becoming increasingly concerned about crude’s impact on exchange traded funds with indirect oil exposure, including business development company (BDCs) funds.
The good news for an ETF such as the Market Vectors BDC Income ETF (NYSEArca: BIZD) is that some analysts see BDCs being able to survive lower oil prices. 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]
“But a new report from Fitch Ratings should provide some respite — at least from the most dire predictions. It concludes that even if oil prices fall further, most BDCs will survive. Leverage ratios would remain at .74 times on average even if they had to write down their oil-related investments (BDCs can’t generally can’t have debt to equity ratios greater than 1 times). Average leverage was .54x in September of last year,” reports Amey Stone for Barron’s.
BDCs are also seen as sensitive to higher interest rates, but that situation may be overstated as well. 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.