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The BDC Reporter In The News

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Not Pleased

Last week, the BDC Reporter was quick to comment on the new BDC leverage rules slipped into the budget.

See our article of March 22, 2018.

Arguably, this was the most critical change to the BDC industry since 1980.

We Are Not Alone

Apparently our stated concerns about allowing BDCs to double their leverage were noted by Bloomberg Gadfly Stephen Gandel, who has similar worries.

We talked at length about the new rules; effective leverage (all that debt piling up in subsidiaries) and many other issues.

While the BDC Reporter’s concern is principally with BDC shareholders, Mr Gandel’s is more about so called “systemic risks” developing in leveraged finance.

Here is a link to Mr Gandel’s article in which we are quoted and which covers many subjects that regular readers of the BDC Reporter will be familiar with.

Both Sides Now

Since the new rules were announced we’ve seen positive reports by several analysts.

The arguments have proceeded along the lines we expected in our article.

One argument is that nothing much is going to change and it’s all a tempest in a teacup.

Another argument is that more leverage will actually result in some BDCs constructing “safer” portfolios as lower yielding loans are added.

A third argument is that the “better” BDCs will take advantage of the new limits to grow earnings while credit agencies, lenders and investors will block the BDCs with poor track records from leveraging up.

We won’t delve into all these arguments here and now.

We want to see how the landscape changes as BDCs ask – or don’t ask – shareholders for permission to leverage up or wait for a year before shifting the leverage gears, as anticipated in the new legislation.

Meh

This will not be a fast moving change, which probably explains why BDC stock prices have not moved much despite an early burst of enthusiasm.

So far investors have “sold the news” or just sat on their hands despite numerous analyst earnings upgrades of individual BDCs.

The UBS Exchange Traded Note with the ticker BDCS – which we regularly roll out at times like these – is trading at or below the level just before the BDC rules change news broke.

See the 5 Day Chart below:

Credit Is A Cyclical Business

In any case. the real impact of the new legislation will not be fully apparent until the Next Recession or Next Crisis.

Then BDCs that have leveraged up even more than the already heady levels of today will see even more drastic changes in their net assets and stock price than their peers who have eschewed taking on even more leverage.

The analogy we’d use is that all BDCs will feel like they’re being shaken about in an earthquake but for some this will be the Big One and for others just some crockery will be broken.

We don’t want to presuppose which BDC will be in which category, but we’ll be watching carefully to see what the 45 public BDCs we track do in the quarters ahead.

Hopeful

Maybe this whole subject will engender a useful debate – lacking till now – about Risk and Return where BDCs are concerned rather than Return alone.

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