October 6, 2011: The Wall Street Transcript has been issuing excerpts of interviews with various Business Development Company movers and shakers all week on Yahoo Finance. We were most interested in the interview with Vernon Plack, the Director of Research at BB&T Capital Markets, and a perennial presence in the BDC space. Mr Plack gives a useful historic review of the industry, its size and composition. When asked to provide “picks” he mentions Ares Capital (ticker: ARCC), in the upper middle market BDC segment and Triangle Capital (ticker: TCAP) in the lower middle market. In both cases he guesstimates that current dividends could be raised in the months ahead. That’s quite in conflict with the sense of impending doom which pervades the industry right now.
BDC Reporter’s Two Cents: Mr Plack knows what he’s talking about, so the Yahoo Finance or even the full transcript are worth perusing. We share his admiration for Ares Capital and Triangle Capital. The latter is one of the few Dividend Aristocrats (a term we just made up) i.e. a BDC which has never cut its dividend.
We were also intrigued by a statistic mentioned. Mr Plack covers 17 BDCs, which is most of the significant players in this sector. He indicated the aggregate portfolios of the BDCs are 47% invested in senior debt, 27% in subordinated debt and the rest in equity and preferred. That may come as a surprise to some investors who think of BDCs as predominantly subordinated debt investors, and demonstrates how the pull-back of the banks (and other lenders) from the market since the Great Recession has allowed many BDCs to add loans farther up the balance sheet. That is one of the best safeguards against the industry revisiting the relatively high loan write-off levels achieved in the 2008-2009 recession.
