Modest Growth and Slowed Investment Activity for BDCs, While Pricing Remains Competitive with Demand Outpacing Supply: Vernon C. Plack, an Expert Analyst at BB&T Capital Markets, Shares His Outlook on the Space

Wall Street Transcript

67 WALL STREET, New York - June 21, 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 and Equity Analysts. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Consistent BDC Dividend Yield - BDC Risk/Reward Profile - Higher Dividend Yields - Business Development Companies Historical Overview

Companies include: Ares Capital Corporation (ARCC); Fidus Investment Corporation (FDUS); Hercules Technology Growth Capital (HTGC); Solar Capital Ltd. (SLRC) and many more.

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

TWST: Last time we spoke, you described the macroeconomic standpoint from BDCs as slow but stable. Is this still the environment the BDCs are operating in?

Mr. Plack: Yes, slow but stable is still pretty accurate. When I define the current environment, the word that I am using most often lately is reasonable. The backdrop for the entire BDC sector is OK. Most companies continue to show some growth both in revenue and EBITDA, albeit in most cases that growth is slow and modest.

Net investment activity slowed during Q1 to about 5.7%, and that compares to a net investment activity of 7.5% in Q4 2012 and 7.3% in Q3 2012. The macro backdrop is modest growth and investment activity has slowed, while pricing remains competitive with demand outpacing supply, which is resulting in tighter spreads with weaker terms and conditions. Portfolio yields have declined roughly 50 basis points year over year, but are still averaging 12% during the last reported quarter for our covered companies. And yield compression is greatest at the upper end of the middle market.

It is interesting, because if you compare spreads to other credit markets, the middle market has actually help up quite well. In fact, the spread between BDC yields and the corporate high-yield market is as high now as it has ever been, so that suggests to us that there is attractive relative value in the BDC space.

Problem assets are still manageable, in our opinion. Nonaccruals as a percentage of total investments stood at about 3%, and that compares to the longer-term average of 4% and also compares to the peak of close to 12% back in the third quarter of 2009.

We see the economic outlook as relatively unchanged. We think we will continue to see slow net investment activity, although we do expect to see that pick up in the second half of this year, in step with our thoughts for the M&A market. There is enough...

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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