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High Yield: Owning BDCs During The Crisis

Published Tue, 31 Mar 2020 13:00:00 -0400 on Seeking Alpha

The coronavirus outbreak and resultant economic disruptions will cause writedowns and cash flow disruptions for business development companies in general.
Portfolio diversification and liquidities are keys to each BDC handling these issues successfully.
We analyze some of the best BDCs to keep holding based on the diversity of their portfolio and the ability to withstand cash flow disruptions.
Co-produced with PendragonY
Given recent market action and the on-going issues with the coronavirus and its spread, many are concerned about how BDCs will perform during today's extraordinary times. BDCs invest in middle-market companies, not the tiniest but far from the largest. Many of these can be very vulnerable to economic disruptions and a slowing economy.
In the near term, BDCs will see some decline in their NAV as assets will have to be written down to reflect current risks. We also should assume there will be some disruption to their cash flow. The keys to a BDC and its investments doing well, beyond just good management at the BDC level, is to have three things:
Low exposure to the most vulnerable sectors, a diverse portfolio of companies with solid debt metrics. Having access to cash to both keep paying the dividend and to help portfolio companies over short-term cash flow difficulties. Likely, many companies, especially the smaller companies that make up BDC portfolios, will seek some relief from rent and or loan payments. Those BDCs that have enough cash to bridge that payment shortfall will do best over the next few quarters. Therefore having good liquidity is key. Much of the costs for BDC is driven by LIBOR rates. So the drop in LIBOR should over the short term reduce their costs. While it also impacts the payments they receive, the reset period is longer, so the spread will increase for a while. Data by YCharts We will analyze in this report five BDC companies that we recently covered here on Seeking Alpha.
1- Ares Capital Corp
Ares... Read more

Stock name Last trade   P/E Earnings/Share Dividend/Share Dividend yield
MONROE CAPITAL 10.48   18.4 0.57 1.40 13.60
PENNANTPARK INVESTMENT 6.32   21.8 0.29 0.72 11.32
SARATOGA INVESTMENT 24.98   8.4 2.97 2.24 8.59
ARES CAPITAL 19.19   10.5 1.82 1.60 8.39
NEWTEK BUSINESS SERVICES 22.91   0.0 0.00 2.32 8.09
MAIN STREET CAPITAL 43.18   16.8 2.57 2.46 5.69


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