67 WALL STREET, New York - November 30, 2011 - 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 Business Development Companies Report 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 Business Development Companies Report, interviewees discuss the outlook for the sector and for investors.
Sanjay Sakhrani is a Senior Vice President and Analyst covering the specialty finance sector in the equity research department at Keefe, Bruyette & Woods, Inc., with specific focus on credit card issuing and payments companies, as well as business development companies. Before KBW, Mr. Sakhrani was at Calyon Securities, a subsidiary of Credit Agricole S.A., where he followed the specialty and mortgage finance sectors. He also spent five years in Citigroup Inc.'s U.S. equity research department's specialty and mortgage finance team. Mr. Sakhrani has a B.S. in finance from St. John's University and an MBA from Cornell University.
TWST: What are the major investment themes for you in the BDC space right now?
Mr. Sakhrani: If you look at the implied risk premiums ascribed to BDCs, specifically embedded in their dividend yields, they are pretty high across the group, which is indicative of some jitters in investing in the group. That is being driven by a number of factors. First, the economic situation and fear that we may be headed into a downturn. Second, you had a couple of problem companies during the past recession that significantly underperformed. One sold itself to another BDC, so I think there is a little bit of hangover effect from the past recession and some of the problems we saw within the industry. Third, I think there are companies out there paying out dividends that are greater than their earnings, so I think there are concerns over whether or not dividend levels are sustainable across the group. Fourth, I would say there have been some competitive issues in the space, meaning competition has picked up, so you've seen some portfolio yield erosion, so people have been worried about that effect on income and therefore the dividends.
TWST: Has the group been impacted by the credit crisis in ways similar to other lenders?
Mr. Sakhrani: They have been affected to the extent that most of their funding has historically been sourced through bank revolver lines. The ripple effects of Dodd-Frank is it has become more onerous on the banks to lend to this space. We've seen some of the players in the industry move away from bank debt or bank-facilitated funding to public market funding, and obviously that's created a little bit of a headwind to earnings at this point in time. Over the long term it could prove to be favorable because it's fixed rate debt that they've incurred, and if rates move up at some point, it would be beneficial.
TWST: You have several "outperform" ratings right now in the BDC space. Who are your top picks in the group and why?
Mr. Sakhrani: I have to say right now we like Ares Capital (ARCC). The reason we like Ares is they have a lot of liquidity and they've been waiting to deploy that liquidity when things got choppier. And it seems to us that the competitive dynamic that existed before has eased somewhat, and you're seeing a pickup in terms of yield, so I think they can probably deploy that liquidity in a more favorable investing environment today. They trade at a pretty lucrative dividend yield at this point. They are almost 10.5% dividend yield. These types of environments are a double-edged sword for these companies. Right now, their stock is weak because there are jitters about the economy, but it's a positive time for deploying liquidity. And the fortunate part of where we are right now for the industry is they have a lot of liquidity to deploy, so they don't need to come out and raise capital, which would be unfavorable given the stocks have kind of taken a little bit of hit. I also think investing today is additive to the dividends over time as we get through some of the concerns right now in the economy, which could be beneficial for the stock performance in the future.
TWST: What about Apollo, which you also have as an "outperform"? What are some specific things about them that you like?
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 Business Development Companies Report is available by calling (212) 952-7433 or via The Wall Street Transcript Online.
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