3 BDC shock rate up to 12%

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Business Development Corporation (BDCs) is one of the largest sources of revenue in the market. Unfortunately, for revenue headhunters, in 2017, the industry is also one of the biggest disappointments on Wall Street.

I’m not so condemned BDC space. I say this as a warning: Although these small and medium-sized enterprises financiers occasionally can be excellent long-term holders, there are still many mines that can be avoided. That is why today, I would like to emphasize three such funds, with a coveted rate of return of up to 12% – each of which may at first glance seem appealing but only one of which now looks like a safe buy .

So how bad is the BDC for 2017?

VanEck Vectors The main exchange-traded fund of the BDC Income ETF barely went bankrupt last year, taking into account a dividend payout of more than 8 percentage points. Forgetting the broader stock market, smashing trades – and even investors hiding in a pile of boring hybrid bundles such as the iShares Core US Total Bond ETF – is even better than those holding BDC funds.

Some of these issues have spread throughout the industry, for example, in increasingly competitive markets. Some cases are more case studies, such as BDC expansion to provide funding for low-quality companies.

Regardless of the circumstances, BDCs are not a “once and for all” business. Those who want to dominate the field in this area must be insightful investors, even with 8% -10% yield is not enough to make up for losses. Well, let’s take a look at 12% of the three BDC dividends, separating the trap from the treasure.

BlackRock Capital Investment Company

Dividend yield: 11.8%

A few months ago I visited BlackRock Capital Investment, but it is worth emphasizing once again that it is tempting to see how this bonus trap looks now.

Founded in 2005, BlackRock Capital Investment Inc. is the parent company of Belek Kelso Capital (hence the BKCC ticker symbol), which provides financing for midmarket companies. It typically invests primarily through high-grade, collateralised bonds (about 60% of portfolio) in the amount of $ 10 million to $ 50 million but also through subordinated / unsecured debt, preferred stock, common stock, and “other” provide the solution.

The BKCC is a diversified operator, not afraid of any department, its most serious tendency of financial companies, accounting for 26% of the financial portfolio. However, all the remaining assets range from chemicals to defense to healthcare.

That sounds good from 10,000 feet, but BlackRock Capital has been running a chaos for the past four years. In fact, it has fallen another 10% from the 5% we have seen since we eliminated it in November.

This is not an emotional shift, nor is the market simply unaware of the potential of BKCC. Since 2012, the company’s top line has fallen 21% and net investment income has dropped 27%. This forced BKCC to pay twice in the past five years, including the dividend announced in early 2017.

Yes, nearly 12% of the revenue is just mouth watering, but it is only a by-product of a permanent decline.

TPG Professional Loan

Dividend yield: 7.8%

The TPG Special Loan, a relatively new BDC, was launched in July 2011 and initial public offering in 2014 and has been a surprise.

Like many other BDCs, TPG provides financing for mid-sized businesses. TPG’s portfolio companies target a wide range of US $ 50 million to over US $ 1 billion and EBTDA ranges from US $ 10 million to US $ 250 million with transactions in the range of US $ 15 million to US $ 350 million.

In the meantime, there are some minor specialties in manufacturing, health care, business services and other industries, including education and royalty-related businesses. Although TPG has a small group of smaller companies in its portfolio, it also financed some prominent companies such as Eddie Bauer, SHAR, 99-minute specialty stores And Tangoe.

Since 2012, net investment income has exploded and 2015 is only a temporary hiccup. Last year’s 102.3 million U.S. dollars was several times better than the 28 million U.S. dollars in 2012, and the company can once again breach this ceiling in 2017. In addition, TPG nearly 8% of the yield is quite safe, of which 39% yield 82% of NII.

This BDC cake icing on the cake? It introduced a formulated variable supplementary dividend in 2017 and, through three quarters, distributed 19 cents per share out of these additional expenses. This means that if the company’s future behavior is similar, investors should enjoy more than 9% of the total revenue!

Main Street Capital

Dividend yield: 5.8%

Main Street Capital is a Houston-based operator that provides capital solutions for low and mid-market companies and debt financing for middle market companies. In short, it has become one of the best BDCs on the market. In the past five years, MAIN shares total return reached 82%, four times better than BIZD.

In the past five years, net investment income has just exploded, rising from 59 million U.S. dollars in 2012 to 116 million U.S. dollars last year, a remarkable growth point. This stems from the keen eye for success stories in MAIN’s history, including investing Quanta services and American concrete in the nascent BDC era.

However, if you have time to open the Main Street Capital pause button, this may be the case now.

The company announced January 3 that Vince Foster will replace its chief executive with executive chairman and chief operating officer and chief executive Dwayne L. Hyzak in the role of president – which is expected to transition in the fourth quarter of 2018. It does not sound intense at more than 4% a week, but it is one of the company’s worst such quick moves in the past few years.

Hyzak clearly knows Main Street, and Foster will still provide some executive chairman’s opinion that BDC is likely to miss Foster in the day-to-day operations of the company.

Care should be taken in the transition of such a long-time executive, but this is a double test for the streets, which have established very high expectations, and thus lead to an elegant valuation. At 166% of NAV, the MAIN price is the steepest in the BDC space.

Now that MAIN’s phone is “hold”, there is no sign of slippage in the street itself, and Foster will play a few more quarters. However, the new funding did not pay a high price for senior management.

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