A Wall Street Transcript Interview with Christopher Nolan, a Managing Director in the Equity Research Department at MLV & Co, Covering the Financial Service Sector: BDCs Well-Positioned to Leverage Returns in a Growing Economy

Wall Street Transcript

67 WALL STREET, New York - June 30, 2014 - 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 - Internally and Externally Managed BDCs - BDC Dividend Growth - BDC Returns - Strong BDC Fundamentals - BDC and Bank Differences - Competitive Outlook for BDCs

Companies include: Prospect Capital Corporation (PSEC), Main Street Capital Corporation (MAIN), and many others.

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

TWST: Please start by giving us a little bit of your background.

Mr. Nolan: Most of my background is on Wall Street, covering banks and specialty finance, mostly regional banks and so forth. I have worked at UBS, Oppenheimer, Maxim Group, CRT Capital and now MLV. At MLV my coverage focuses on BDCs, or business development companies, which is sort of an amalgam; it's sort of like a REIT meets a bank. If you think about a real estate REIT, which basically invests in property, a BDC is very similar to that structure except it invests in the debt and equity of companies. Thus, it is a type of nonbank lender.

Some of the key differences that BDCs would have relative to a bank is, first and foremost they do not take deposits. Thus the regulatory oversight of a BDC is a lot different than a bank. The second difference is that a BDC is required to distribute at least 90% of their earnings as dividends to shareholders, and this is because corporate income taxes are paid at the shareholder level. Because BDCs pay out substantially all of their income as dividend, they need to constantly raise equity and debt capital in order to grow their investment asset base. Because they need to steadily raise capital, they are actively engaged with their shareholder base on an ongoing basis.

On the business side, BDCs have been actively making loans to privately owned companies in a variety of industries with at least $3 million of EBITDA per year. Often these are companies that don't have significant fixed assets, but they have cash flow. Think of a software company. A software company may have employees and revenue and a cash flow stream, but it often doesn't have sufficient hard assets, like real estate, that a bank would want to secure their loan against. The loan markets that BDCs target really started growing following the 2008 financial crisis, when banks stepped back from non-real-estate commercial lending due to risk capital and regulatory considerations.

BDC stocks generally offer attractive dividend yields to shareholders, roughly ranging from 7% to 13% on average. This high dividend makes BDCs stocks attractive to retail investors. Currently institutional investor activity is limited, in part given that BDCs represent a small niche in the financial services sector. The entire market capitalization for the BDC sector is only $30 billion Further, BDCs are often externally managed, with the manager receiving a combination of base management fee, which is anywhere from 1% to 2% of assets, and an incentive fee, which is usually 20% of net investment income plus net gains. This fee structure impacts returns and does not fully align management and shareholder interests in my view.

TWST: Is the current credit market one that favors BDCs over banks, or is it wrong to look at it as something that favors one over the other?

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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