“What makes them especially interesting now is that the loans they hold are mostly floating rate, which means BDCs could earn more as rates rise. While Federal Reserve officials continue to rattle sabers about hiking the federal-funds rate this year, other short-term rates are already rising. Most loans are pegged to the London interbank offered rate, which, at 0.85%, is up from 0.32% a year ago. Libor needs to rise above a preset floor, usually 1%, for the floating-rate feature of most loans to kick in, but it’s getting close,” reports Amey Stone for Barron’s.
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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.
Additionally, since the debt is typically senior secured and set to float with interest rate benchmarks, there is diminished rate risk. 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.
“BDCs have attributes similar to the bank-loan funds covered in this column last week. But BDCs employ leverage equal to about 70% of their assets, which boosts income—and risk. Closed-end floating-rate funds are similar to BDCs, but those funds use leverage up to only about 40% of assets,” according to Barron’s.