Treasury Secretary Tim Geithner has recently warned other countries about undercutting US regulatory efforts to lure business away from American banks, which will help small cap business development corporations (BDCs) such as Pennant Park Investment (NASDAQ: PNNT
), Prospect Capital (NASDAQ:PSEC
), Solar Capital (NASDAQ: SLRC
),and MCG Capital (NASDAQ: MCGC
). Even though Treasury Secretary Geithner was more concerned with protecting the interests of money centre banks such as JP Morgan (NYSE: JPM
), Citigroup (NYSE: C
), Bank of America (NYSE: BAC
) and Wells Fargo (NYSE: WFC
), BDCs will do better when large financial institutions are thriving.
BDCs lend and help finance the companies that major banks like JP Morgan, Bank of America and Wells Fargo do not pursue. When Wells Fargo, JP Morgan, and Bank of America are strong, BDCs are helped by the easier money for other activities that the major banks provide. This keeps the overall economy thriving, which assists the traditional customer base for BDCs.
A BDC will typically operate as part lender, part owner. Like a private equity company, many times they will take an ownership in a company. Generally, however, they lend money and secure a seat on the board of the creditor as part of the debt package. Leverage can be utilized by a BDC, but only $1 worth for each $1 of assets, not the 33 to 1 that was deployed by some firms on Wall Street before The Great Recession. BDCs have a much better and closer look at the credit worthiness of a borrower, making their portfolio stronger. The number of major investors finding out that their investments in companies in China has been wasted due to fraud shows how important it is to be up close and personal with the recipient of funding.
As with Citigroup, JP Morgan, Bank of America and Wells Fargo, BDCs took a beating in The Great Recession. But the rebound has been stonger than for the overall economy. While the S&P 500 returned 13 percent last year, the Ladenburg Thalmann BDC Index returned 45 percent.
As part of their structure, BDCs do not have to pay corporate taxes so long as they pass at least 90 percent of their income along to investors as taxable dividends. Here, BDCs have major banks beat: Prospect Capital pays a 10 percent dividend, Solar Capital pays a 9.9 percent dividend, MCG Capital pays a 9.4 percent dividend and Pennant Park Investment pays an 8.6 percent dividend.
By comparison, JP Morgan pays a 2.41 percent dividend, Wells Fargo pays a 1.79 percent dividend, Citigroup pays a .01 percent dividend, and Bank of America pays a .36 percent dividend.
Treasury Secretary Tim Geinthner is a friend of Wall Street, These efforts by Geinthner will also benefit small cap BDs as the overall financial sector gains when money centre banks are stable.