30+% BDC Average Portfolio Growth in 2014: A Wall Street Transcript Interview with Vernon C. Plack, Director of Research at BB&T Capital Markets and Head of the Capital Markets Equity Research Team

Wall Street Transcript

67 WALL STREET, New York - December 27, 2013 - The Wall Street Transcript has just published its Business Development Companies Report offering a timely review of the sector to serious investors and industry executives. This special feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: BDC Risk/Reward Profile - Business Development Companies Historical Overview - Yield Compression Issues - Internally and Externally Managed BDCs - BDC Dividend Growth

Companies include: Publicly Traded Business Development Companies

In the following excerpt from the Business Development Companies Report, an expert analyst discusses the outlook for the sector for investors:

TWST: BDCs are an interesting space that has gotten attention and then waned in attention. What is happening now in the BDC space?

Mr. Plack: The past year has generally been in line with our expectations. Year over year, our covered companies experienced portfolio growth of 18%, yield compression of 3%, core income per share growth of 6%, and resulting dividend per share growth of 2%. However, if you exclude Solar Capital (SLRC), which decreased its dividend 33%, dividend growth was actually 5% for our covered companies. By comparison, our expectations were for 16% portfolio growth, flat yields, 8% core income per share growth and 5% dividend growth. The biggest surprise has been that portfolio growth has decelerated as much as it has during the past four quarters, although we think we are at a point where that has likely bottomed and that it is going to pick up from here.

From a stock performance standpoint, in our group of companies, the total return for the past 12 months has been 26%. That compares to the S&P at 35%. The best performing stocks, not surprisingly, were those with strong portfolio and dividend growth, such as Hercules (HTGC) and Fidus (FDUS). Companies that did not perform as well as the group included Monroe (MRCC), which is not yet earning its dividend and issued stock below net asset value, as well as Solar Capital, which had to cut its dividend due to early portfolio repayments.

We currently view valuation as fair. The current dividend yield for the group is 7.5%, which is in line with the historical average, while price to NAV is just under 1.1 times, which is also in line with the historical average. The yield versus the S&P 500 and the price to NAV versus the S&P 500 is also within the range of normal, and the yield versus the 10-year Treasury and compared to high-yield bonds is also within what we view as normal.

So where are we headed? We believe that our covered companies have enough available capital to grow their portfolios in excess of 30%, ranging from 4% to 84%. During the next 12 months, we are looking for average portfolio growth of 20%, ranging from 3% to 64%. We are estimating flat portfolio yields. Resulting core income per share growth is expected to be 7% while dividend growth is expected to be 3%.

Investor concerns include the impact of higher interest rates, not only on earnings but also on stock performance. Regarding earnings, we looking for higher interest rates to have a positive impact given the asset-sensitive position of most balance sheets...

For more of this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

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