Tag Archives: BDC

Business, Finance, Occupation & Industry

How Profitable Is Main Street Capital?

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By Robert Eberhard, The Motley Fool

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Earlier this week, I took a look at where Main Street Capital gets its money, but revenue is only part of the story. What’s more important is how much of this revenue eventually makes its way to investors in the form of earnings.

Main Street is unique because it receives special tax treatment as a business development company, and because of this, it’s not as simple as subtracting expenses from the net revenues earned as it is for other companies. Nevertheless, when compared to others in its business, it seems to be a strong performer and should be able to perform well for quite some time.

What unique tax treatment?
Similar to real estate investment trusts (REITs), a business development company (BDC) can avoid paying corporate income taxes on its shareholder distributions as long as it distributes 90% of its “investment company taxable income” each year. Because of this, like REITs, BDCs also tend to have high dividend yields and tend to be favored by investors seeking regular income. Currently, Main Street‘s dividend yield is near 6%, making it an attractive investment option.

Because of its unique tax treatment, the “bottom line” at Main Street is different from most companies. Whereas most companies will report a net income after subtracting out expenses from revenues, Main Street is required to account for the gain in its investments as well, and reports the net increase in net assets each quarter. Earnings per share are then determined by dividing the number of outstanding shares by this number, which is why Main Street‘s payout ratio may not always equal 90%:

 

2012

2011

2010

Net increase in net assets per share

$3.53

$2.76

$2.38

Dividends paid per share

$1.71

$1.56

$1.50

Payout ratio

48.4%

56.5%

63%

Source: Company 10-K. 

Expenses still matter
Though Main Street has a unique way of determining its net income, we can still take a look at its expenses to see its costs for doing business. A large portion of the capital that Main Street uses when investing in companies comes from the Small Business Administration (SBA) in the form of loans, which totaled $225 million at the end of 2012. The interest paid on these and other loans was the largest expense paid by Main Street during 2012, totaling $15.6 million during the year.

Other expenses at Main Street also totaled around $15.6 million for the year. Unlike a bank like PNC Financial, which needs 56,000 employees to run its business, Main Street has only 30 employees, keeping personnel costs to a minimum. Its business model doesn’t require a lot of employees, but as it continues to expand, it could potentially add more down the road.

What about some other BDCs?
Traditionally, what Main Street and other BDCs do is typically the realm of private equity firms, so there aren’t a whole lot of …read more

Source: FULL ARTICLE at DailyFinance

Business, Finance, Occupation & Industry

Will Goldman Sachs Kill This Smart Investment?

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By Dan Caplinger, The Motley Fool

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Everyone likes to take advantage of tax benefits whenever they can. But when new players start using tax-favored vehicles for questionable purposes, it threatens not just those new players but also those who’ve used the tax breaks for decades.

That’s what Goldman Sachs may be doing to business development companies. Last week, the investment bank said in an SEC filing that it was approaching an initial public offering of shares in its Goldman Sachs Liberty Harbor Capital unit, which it will structure as a BDC in part to “take advantage of specified reduced reporting and other burdens that are otherwise applicable generally to public companies.” Those words should strike fear into investors in BDCs that lack those motives, as the scrutiny that a Goldman investment can bring could jeopardize the entire industry.

What’s a BDC?
Business development companies are publicly traded entities that invest the bulk of their capital in privately held investments. Different BDCs hold different types of assets, ranging from term loans and closely held traditional and convertible bonds to unregistered equity securities. With a willingness to invest both in senior debt and subordinated debt, BDCs often help bridge the gap that a company faces between the time it gets its initial financing and when it’s ready to turn to the public capital markets for the money it needs to expand further.

BDCs also get a tax break from the IRS. As long as they meet the requirements of their BDC status, they don’t have to pay corporate-level tax.

The key requirement for investors is that BDCs have to distribute 90% of their income to their shareholders. That has produced extremely high yields for shareholders, with Prospect Capital yielding more than 12% at current levels and rivals Ares Capital and Apollo Investment in the 9% to 10% range.

What’s at stake
These three BDCs and many others look like what lawmakers would have intended in creating the special BDC provisions. Ares provides capital to more than 150 different companies, with positions of various sizes. Prospect focuses largely on middle-market companies like Totes Isotoner, reaping higher yields but with arguably more risk by taking on equity exposure. Like Ares, Apollo tends to hold more loans and other debt, with some well-known companies like Ceridian and Aveta within its portfolio.

By contrast, Goldman’s BDC is somewhat of an affront to lawmakers’ intent. With a stated purpose to reduce disclosure responsibility, Goldman is likely to raise questions not just about Liberty Harbor Capital but the entire class of business development companies.

The move also comes at an unfortunate time, as the federal government looks for ways to cut its budget deficit. Other pass-through tax entities, such as master limited partnerships, have seen threats appear to their favored tax status. So far, Congress has taken no action, but the threat increases whenever an entity is arguably misused.

What BDC investors should do
For now, BDCs aren’t likely …read more
Source: FULL ARTICLE at DailyFinance

Business, Finance, Occupation & Industry

These Stocks Have Great Growth Potential

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By Selena Maranjian, The Motley Fool

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Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you’d like to add some small-company stocks to your portfolio, the Vanguard Small Cap ETF could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously.

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The Vanguard ETF‘s expense ratio, which is its annual fee, is an ultra low 0.10%. 

This ETF has performed  well, beating the S&P 500 over the past three and five years. As with most investments, of course, we can’t expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.

Why small caps?
It’s common, and reasonable, to invest in lots of large-cap companies, as they’ve typically proven themselves enough to grow large, and tend to have some competitive strengths. But it’s also smart to include smaller companies in your portfolio, as the best of them can grow rapidly and eventually become large caps.

More than a handful of small companies  had strong performances over the past year. Natural-gas specialist Cheniere Energy soared 75%, with investors excited  about its plans to build a liquid natural gas (LNG) export terminal to ship gas procured relatively inexpensively here to regions where it can be sold at a much higher price. They also like the stability that the company’s planned long-term contracts  should offer. It’s currently income-poor, but seems to have some long-term gains locked in. The stock is trading near a 52-week high.

American Capital , a business development company (BDC) that’s also involved in mortgage-backed securities, surged 68%. It was upgraded  in February by analysts at Zacks, who liked its expense and debt reduction, along with better-than-expected earnings. But more recently, Wells Fargo analysts downgraded the whole BDC sector, citing heightened credit-market risks and steeper valuations. Some are hoping that American Capital will reinstate its dividend in the near future, as management has said  it would like to do. In the meantime, it has been buying back shares, which isn’t always the best thing for a company to do. There’s a case to be made, though, that the company may be too inscrutable for most investors.

United Rentals gained 26%, renting out construction and industrial equipment, among many other things. Though its P/E ratio of 68 looks steep, its forward P/E of nine is much more attractive, suggesting strong expected growth. Indeed, revenue has been growing at a double-digit clip over the past three years, though free cash flow is negative.  Along with its fourth-quarter earnings, the company reported working on paying down debt, and expects to have significant free cash flow in 2013. It also pointed to …read more
Source: FULL ARTICLE at DailyFinance

Business, Finance, Occupation & Industry

OFS Capital Corporation Announces First Quarter 2013 Dividend and Financial Results for Year Ended D

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By Business Wirevia The Motley Fool

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OFS Capital Corporation Announces First Quarter 2013 Dividend and Financial Results for Year Ended December 31, 2012

ROLLING MEADOWS, Ill.–(BUSINESS WIRE)– OFS Capital Corporation (NAS: OFS) (“OFS Capital” or the “Company”) today announced its first quarter 2013 dividend and its financial results for the year ended December 31, 2012.

The consolidated results for the year ended December 31, 2012 reflect the performance of the Company’s predecessor, OFS Capital, LLC, prior to the Company’s initial public offering (“IPO“), which was effective on November 7, 2012. Based on the Company’s qualification to be treated as a business development company (“BDC“) and related changes in accounting principles immediately following the completion of the IPO, the Company’s consolidated results for the year ended December 31, 2012 may not be indicative of the results reported in future periods. In accordance with applicable accounting standards, the Company has included in this press release consolidated results subsequent to its IPO from November 8, 2012 through December 31, 2012 (the “stub period”).

…read more
Source: FULL ARTICLE at DailyFinance


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Business, Finance, Occupation & Industry

Here's What This "Market-Destroying" Investor Is Buying

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By Selena Maranjian, The Motley Fool

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Every quarter, many money managers have to disclose what they’ve bought and sold, via “13F” filings. Their latest moves can shine a bright light on smart stock picks.

Today, let’s look at Joel Greenblatt’s Gotham Asset Management. It’s of great interest to many investors because Greenblatt is the author of the well-regarded bestseller “The Little Book That Beats the Market” and because his system of seeking out companies with high returns on capital and hefty earnings yields. His “Magic Formula” has many fans. As my colleague Morgan Housel has noted, “The simple formula absolutely destroys market averages over time. Greenblatt backs this up with considerable statistical evidence.”

The company’s reportable stock portfolio totaled $1.7 billion in value as of Dec. 31, 2012.

Interesting developments
So what does Gotham’s latest quarterly 13F filing tell us? Here are a few interesting details:

The biggest new holdings are Wells Fargo and Computer Sciences. Other new holdings of interest include American Capital , a business development company (BDC) that’s also involved in mortgage-backed securities. It was recently upgraded by analysts at Zacks who liked its expense and debt reduction and better-than-expected earnings. Some are hoping that the company will reinstate its dividend in the near future, as management has said it would like to do, but my colleague John Maxfield has warned that the company may be too inscrutable for most investors.

Among holdings in which Gotham increased its stake were R.R. Donnelley & Sons and InterDigital . Commercial printer Donnelley provides labels, packaging, and more to the private and public sector. It also prints many thousands of forms for the SEC, and bought Edgar Online. The company took some flack recently when it released Google’s earnings report early last year. Bears worry about its debt and fear a dividend cut. The dividend recently yielded a whopping 10%.

InterDigital may have disappointed investors by not being acquired, but it’s otherwise been busy raking in licensing revenue from its many patents (generally focused on mobile telecommunications), selling many of its patents, and also winning some significant legal battles. Also boding well for the company is its last earnings report, in which it handily topped expectations.

Gotham reduced its stake in lots of companies, including Sirius XM Radio . Heavily shorted, Sirius has faced threats from automakers offering their own entertainment products, but for now they are still offering Sirius radio as well. Growing sales of vehicles is also a plus for Sirius, as is Pandora’s recent decision to start charging its heaviest users. Despite the pessimism of bears, the stock recently hit a 52-week high.

Finally, Gotham’s biggest closed positions included Herbalife and Advanced Micro Devices . Advanced Micro hasn’t been kind to many investors, averaging an annual loss of about 7% over the past 20 years and down 66% over the past year. It’s fighting a struggling PC market and has suffered some heavy free cash flow losses in recent years. …read more
Source: FULL ARTICLE at DailyFinance