Why a beat-up, high-yielding sector may be turning a corner now
“Some of the negative headlines about defaults have dissipated, and we’ve seen new origination spreads move higher along with the base rate as markets start to expect interest rate hikes in the United States,” Sabourin says. “So now we see some positive trends, but nonetheless the public BDCs are feeling the heat from private BDCs. The negative sentiment is still there but it creates interesting opportunities. It might be a good time to start to accumulate for those looking for income who don’t care about volatility.”
The public advantage in BDCs
Sabourin has long maintained that publicly listed BDCs offer a few advantages relative to their private equivalents. While private BDCs managed by companies like Blue Owl and Oaktree have been the subject of significant negative headlines, public BDCs have borne the headline risk without actually carrying as many under-performing loans. As it stands, they offer attractive yields at a NAV discount relative to private BDCs, with far more significant liquidity.
Sabourin caveats his interest in public BDCs with the expectation that volatility will remain elevated and NAV may continue to fall. However, he sees some eventual opportunity for capital appreciation as the loans and sector exposures that currently weigh on BDCs get worked through or their issues get resolved. In the meantime, he sees the coupon income from these products as attractive enough to warrant some investment despite the risks priced into their NAV.
“I see BDCs as high yield returns but with an investment grade rating,” Sabourin says, when asked how to view BDC return expectations. “They’re not junk… it looks like junk at 12 per cent, but it’s not junk for sure. These are loans that generate income and they’re secured by assets, but maybe sometimes the asset might be lower than expected.”
Who BDCs could be for and how to access them
Sabourin argues that most investors want additional income in their portfolios, and that suitability for a BDC exposure may be better assessed on a client’s capacity to tolerate volatility. He argues that any exposure should be limited in nature and based on client education. For those clients who want the income and can tolerate the volatility, Sabourin nothes the entire publicly listed BDC market is on US exchanges, however one Canadian-listed ETF, the Accelerate Diversified Credit Income ETF (INCM.TO) offers exposure to US-listed BDCs in Canadian dollars and can help with the management of cross-border tax issues. Given the high interest income on these assets, Sabourin says they are likely most advantageous if held in a TFSA.
