"We've been working on about 10 of them [secondary offerings] during the past two months," says Steven Boehm from Sutherland Asbill & Brennan. "Many BDCs are back over their NAV and can go back to the markets, and underwriters are seeing strong demand for yield products."
Ward says one of the key metrics he and his BDC research team at Stifel Nicolaus focus on is operating earnings, which is based on the ability of companies in a BDC's portfolio to make interest payments on their loans. "We focus on earnings yield because we think of BDCs being a lot like REITs in that if you earn it, you have to pay it out to shareholders," Ward says.
Dividing recent BDC stock prices by their earnings, he notes, produces an earnings yield of 10%, or close to the group's collective dividend yield. "That's clearly sustainable because I think that's what they can earn," Ward says. "Nobody has a huge mismatch between their dividends and earnings right now."
Non-traded BDCs
In addition to publicly traded BDCs, there are also several non-traded BDCs which are touted to offer certain advantages over the traded variety. That said, these securities come with greater liquidity restrictions.
Philadelphia-based Franklin Square Capital Partners launched the first non-traded BDC in early 2009. That vehicle, FS Investment Corporation (FSIC), invests in senior secured loans of private U.S. companies across a range of sectors, with 78% of its capital in first and second lien positions.
FSIC's minimum investment is $5,000, and investors must either have a $250,000 net worth or both a minimum annual net income of $70,000 and net worth of $70,000. The offering price has gone from $10 a share initially to a recent $10.70.
Franklin Square CEO Michael Forman says the fund has raised more than $2 billion since inception and he expects it to reach $3.5 billion in gross assets when fund-raising is completed later this year. After that's done, Forman says they plan to launch FSIC II.
Last July, Franklin Square launched its second non-traded BDC, FS Energy & Power Fund (FSEP), to invest in the debt and equity of private companies in the energy and power markets. It has the same investor minimum requirements and initial offering price as FSIC, and so far has raised about $100 million.
Both BDCs are subadvised by GSO/Blackstone, the credit finance platform of the Blackstone Group. They're distributed through the independent broker-dealer channel, either with an up-front load in a commission structure or with no up-front load in an advisory fee structure. The recent yield for FSIC ranged from 7.5% to 8.1%, and the yield for FSEP ranged from 6.25% to 6.7%, depending on how it's sold to investors.
Non-traded BDCs have long holding periods of five years to seven years, and early redemptions generally come with a penalty. Forman says this enables Franklin Square to take a long-term view with their investments by tuning out the noise of market volatility. "We're able to build a portfolio of investments without needing to manage in a publicly traded environment," he notes.