Investing in BDCs

Anyone have experience with these? yields are attractive. I’m familiar with their history and structure but does anyone have an outlook? pending regulation or headwinds?

The high yields have driven a lot of capital into this space in recent years and there is now a lot of competition for loans amongst the BDCs. Some people have a negative outlook on these companies b/c they have to chase yield and stretch credit standards to get deals done. As long as credits are performing and you can replace loans that are refinanced at attractive yields (easier said than done), investors can do well clipping the dividends on these.

The opaque management fees of BDCs aren’t too favorable but you get that with these types of investments.

A good general rule with BDCs is to not pay above book value. If you want to buy ones trading below book, really look under the hood b/c there could be some ugly stuff there.

I do a lot of income producing investments, mainly bank preferreds. For my juice I prefer CLO Equity over BDCs b/c determining asset quality is difficult for many BDCs (they have unique loans to very small companies). On BDCs and especially CLO equity, you’ve got to get the hell out if you start to get worried about the credit cycle turning, though. It will get ugly.

are there any clo funds, i looked few months back but nothing publicly traded.

back on topic…i like reading this guys commentary pretty interesting (but long).

he writes about BDCL

Yes, Eagle Point Credit Co. (ECC) and Oxford Lane Capital Corp (OXLC). I’ve ridden with ECC b/c I like the management more. You get a ton of leverage with those so plenty of downside but should do well in stable markets.

Some BDCs buy CLO equity and mez but aren’t pure plays.

i appreciate the response guys.

the addressable ‘middle market’ is attractively sized but I am unaware if the growing amount of BDCs since post crisis will begin to cannibalize itself.

i was originally looking at non-traded BDCs with slight majority weighted in first lien senior secured that have quarterly liquidity. but most people seem to be on team “mid to late credit cycle” so I don’t want to get caught slippin without being able to redeem. plus fee structure seems lofty.

are you guys aware of any pending legislation in the pipeline that would help or hurt these vehicles?

I’d be careful with private BDCs. I have never dealt with them and my knowledge is limited, though. My comfort level with these leveraged credit investments at this point in the credit cycle is I can dump them quickly in public markets. Liquidity on them isn’t great but it is there.

Regarding legislation, I don’t know specifics. I don’t own these (outside of ARCC) so I don’t pay too much attention to them. There was noise last year related to RIAs not being allowed to sell them to their clients – I don’t recall how that worked out. BDCs rely on government-subsidized SBA loans as cheap financing/leverage. If that were to go away it’d be bad for them but I don’t think anything is on the horizon regarding that.

Bdc are nasty. Stay far away. American capitals balance sheet is a thing of beauty though

i appreciate the info

I recently took a look at several firms that run their own BDCs and/or play in MM levered loans (Golub,Ares, Apollo, Garrison, Kayne, NXT, etc…). The way you outperform in that business is by mitigating losses and having high recovery rates. As others noted, we are probably mid/late credit cycle. As such, you really have to be careful with vintage risk. For example, if you took on the '08 and '11 vintages you got hit pretty badly (S&P had something like 38% default rate for 2008). So timing is key.

I ultimately went with Audax since they spread out vintage risk, have a limited lock-up period (1yr), low fee (1% on invested equity; not total capital deployed), all senior loans, and seemed to have a very strong underwriting and risk management process. Golub, Apollo, Ares were all also great, but I didn’t think they were paying me enough for 7-10 year lockups (100-250bps higher IRRs, but also included non-senior loans).

BDCs are a relatively stable source of income producing vehicles (just like REITs). As many others said here, it is all about the loans they make and the credit cycle. ARCC is one I own, credit rating is good. Nice mixture of fixed/floating loans to an array of pretty strong companies on the credit rating side. With the ACAS acquisition behind them, portfolio has a bit of cleaning up to do. But I feel like every portfolio should have an income producing allocation (whether it is BDCs, Equity REITs, Mortgage REITs, or MLPs).

getting killed today. anyone pick anything up?

Sector had terrible earnings, especially TPAC. Not sure why ARCC has been getting hammered that much, portfolio has a good mix of floating rate loans… Just waiting for the ACAS acquisition to be fully integrated I suppose is taking some time.