1 Great Trend for High-Yield BDCs

Creditors are sending BDCs, like Fifth Street Finance  (NASDAQ: FSC  ) and Ares Capital  (NASDAQ: ARCC  ) ,a message: Keep growing.

The debt markets may have never been so good to high-yield business development companies, which raise funds in the capital markets to invest in smaller, private businesses.

Cheaper funding abound
The debt markets are so hungry for yield that BDCs are raising cheaper and cheaper debt. Recently issued BDC debt and preferred equity is trading well below the yield at the time of issuance.

The table below shows recent capital raises and compares the current yield to the yield at the offering:

Company

Capital Raise

Date

Yield at Offering

Current Yield

Fifth Street Finance

Unsecured senior note

February 2014

5.00%

3.9%

Gladstone Capital (NASDAQ: GLAD  )

Preferred stock

May 2014

6.75%

6.4%

Ares Capital Corporation

Unsecured senior note

November 2013

5.00%

3.2%

Fifth Street Finance and Ares Capital Corporation are part of the larger, more established group of industry players, and both have investment-grade debt ratings. Not surprisingly, these two have been some of the most active in refinancing long-term debt and their credit facilities as rates decline. Along with Prospect Capital (NASDAQ: PSEC  ) , these three BDCs enjoy access to unsecured institutional note market, which is less expensive and more expansive than retail channels.

Ares Capital is the undisputed leader in arranging cheap financing. If it weren't for the fact its recent issue is callable, it would likely trade at an even lower yield. Ares' non-callable debt maturing in 2018 yields just 2.76% at the current price.

Gladstone Capital is an interesting case. The company issued new preferred stock at 6.75% to refinance existing preferred shares at a face rate of 7.25%. Its most recent offering and subsequent trading on the market suggests that it could raise even cheaper seven-year capital today.

Do note that Gladstone likely uses preferred stock because it is too small to raise a reasonably priced round of debt financing. The company pays more for its secured credit facility than Ares Capital Corporation pays for five-year, unsecured notes! Even still, investors are willing to accept lower yields on its preferred equity raises than they were at the time of the offering.

Why it matters
BDCs are nothing more than a pile of debt and equity capital that is invested in... other companies' debt and equity.

In recent months, the yields BDCs earn on their investments have been in a broad decline. While declining yields crimp a BDC's profitability, the decline can be offset with lower funding costs.

Equity investors should appreciate the recent generosity of the debt markets -- cheaper financing is undoubtedly good for the industry and its shareholders. 

Top dividend stocks for the next decade
BDCs and other dividend stocks have solidly outperformed their peers. The consistent dividends allow for robust, long-term compounding potential that you can't find elsewhere. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.


Read/Post Comments (1) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2989046, ~/Articles/ArticleHandler.aspx, 11/28/2014 2:16:48 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement