67 WALL STREET, New York - January 5, 2012 - The Wall Street Transcript has just published its FREE 2011 Business Development Companies Report offering a timely review of the sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below. FREE 2011 Business Development Companies Report offering a timely review of the sector to serious investors and industry executives. This page 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 - Higher Dividend Yields - Private Middle Market Funding - Business Development Companies Historical Overview
Companies include: Allied Capital (AFC); American Capital (ACAS); Apollo Investment Corp. (AINV) and many more.
In the following brief excerpt from the FREE 2011 Business Development Companies Report, interviewees discuss the outlook for the sector and for investors.
Vernon C. Plack, CFA, is the Director of Research at BB&T Capital Markets, and he heads its capital markets equity research team. He is a Member of the BB&T Capital Markets management group and also serves as Senior Analyst in the specialty finance sector. In its 2010 "Blue Chip Analyst" awards, Forbes.com ranked him number one in the investment trusts industry. Performance was based on three years of earnings estimates and recommendations. In 2007, Mr. Plack was named number one earnings estimator in his industry and number three overall by the Financial Times/StarMine in its Analyst Awards survey. Before joining the firm in 1994, he was the Bank and Thrift Analyst for Johnston, Lemon and Co. Inc., in Washington, D.C., and an Investment Representative for Alex. Brown Investment Management in Baltimore. Mr. Plack graduated from the United States Military Academy at West Point with a B.S. in mechanical engineering and management. He received his MBA from Campbell University. A former President of the Richmond Society of Financial Analysts, Mr. Plack is also a member of the CFA Institute.
TWST: You have covered the BDC space for quite awhile. How has the space evolved over time?
Mr. Plack: This is still a relatively small industry. If you were to add up the market caps of all the companies in the BDC space, the total is only $15 billion. By comparison, many individual companies have market capitalizations greater than the total market cap of this entire sector. There are, however, several companies that are more than $1 billion in cap. BDCs are primarily owned by retail investors, and it's a group that has expanded during certain periods, depending on the willingness of the capital markets to fund new companies. There were quite a few companies that came public in 2004, in 2007, before the market started to fall apart, and again in 2010, once the market recovered. So it's still a relatively new industry and a very small industry. It gets limited coverage on the Street, and as a result you often find real opportunities in some of these stocks. Over time, we expect additional companies to go public and look for the industry to grow given the appeal to income-oriented investors and the important and real purpose for why BDCs exist, which it to provide capital to the private middle market.
TWST: What is a BDC, exactly?
Mr. Plack: BDCs primarily provide capital to private, middle-market companies, mostly in the form of debt, both senior and subordinated. About 47% of our company's portfolios are in senior debt, about 27% is in subdebt/second-lien, and then the rest is in equity, either preferred or common, and some in the other category. Most private, middle-market companies have limited access capital and BDCs help to meet this need. These companies are typically too small to issue debt or equity in the public markets. The BDC structure came about as a result of Congress realizing there was a need to facilitate the flow of capital to companies that that did not have ready access to the public capital markets or other forms of conventional financing. It is one of the really positive steps that Congress has taken to help private businesses gain access to capital.
TWST: What are the most important factors you are watching in terms of BDCs right now?
Mr. Plack: If you look at the BDC industry, we believe it trades primarily on two relative metrics. The first is the outlook for the dividend and the second is the outlook for NAV, or net asset value. Using both metrics as a determination of relative value to the overall market has resulted in outsized returns over the life of this industry. Given that BDCs are high-dividend-paying stocks, we believe the best way to look at them is in terms of what they are yielding compared to another risk asset, the S&P 500. Currently, the S&P 500 is yielding about 2.2% while the BDC industry is yielding about 8.7%. The average relative multiple has been 4.6 times, and the group is currently trading at four times, within the normal range, which leads us to believe the group is currently fairly valued. On an asset basis, the current price to book for the S&P 500 is two times while the price to net asset value for BDCs is 0.8 times, for a relative multiple of 0.4 times, in line with the historical average, thus another indicator to us that the group is fairly valued. Given our current view that the industry as fairly valued, we remain very selective in terms of what stocks we are recommending. Positive factors include plenty of available capital to invest in new portfolio companies, improving asset quality and good dividend coverage. Negative factors include macroeconomic uncertainty, the impact on NAV from declining market values for equities and higher risk debt and the inability to raise additional equity capital since most BDCs are trading below NAV.
TWST: You said you are very selective right now. Who is your top pick in the BDC space and why?
Mr. Plack: We have several, but in an environment like this there's definitely a desire to stay with quality. So on the large-cap side, the flagship company, the best performer in this group, which has a market cap of about $3 billion, is Ares Capital (ARCC). Ares Capital is our top BDC pick because when the group recovers, Ares will lead that recovery. Stock is yielding 9.4% right now. We feel very good about the stability of the dividend and even suspect that if we do not find ourselves in a situation where the economy gets much worse, they have the opportunity to perhaps increase their dividend, not much, but increase their dividend a little bit over the next 12 to 18 months. The stock is selling just below net asset value. The stock typically trades at a premium to net asset value and the dividend yield is usually lower, in the 8% range.
TWST: Who else do you like in BDCs?
The Wall Street Transcript is a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs and research analysts. This FREE 2011 Business Development Companies Report is available by calling (212) 952-7433 or via The Wall Street Transcript Online.
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