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The pain is spreading among business development companies that put money to work in an unloved corner of the capital markets: CLO equity.
Business development companies, closed-end funds that trade on an exchange, like stocks, are themselves out of favor. They are trading at steep discounts to their net asset values as many of their investments sour, causing them to trim payouts to shareholders. That's particularly true of BDCs that invest in the equity, or most subordinate tranches of notes issued by collateralized loan obligations.
This, in turn, is putting pressure on BDCs to sell assets to repair their balance sheets.
BDCs and CLOs are similar animals; both pool money from investors to lend to below investment grade companies. But CLOs are private funds and generally invest in loans to large companies; these loans are broadly syndicated and relatively easy to buy and sell. Publicly traded BDCs, on the other hand, typically invest in loans to smaller companies as well as in other, less liquid assets - such as debt and equity issued by CLOs.
CLO securities sold off sharply early in the year, and, sure enough, several BDCs that reported first quarter earnings in early May, including TICC Capital, KCAP Financial and Ares Capital, have significant realized and unrealized declining valuations of their CLO holdings, including third-party and internal equity.
This comes on top of the drops that were realized in the fourth-quarter by two other BDCs that are major buyers, American Capital Corp. and Prospect Capital.
Prospect, which at nearly $1 billion has the most CLO equity holdings among BDCs, was scheduled to release its first quarter earnings after markets close on May 10.
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But despite the deterioration in their CLO holdings, these BDCs appear to be maintaining their dividends, and in TICC's case, at least, to be in no particular hurry to unload holdings.
To the contrary, TICC added $400,000 in CLO equity to its portfolio during the first quarter, as well as $2.7 million in CLO debt, according to filings and statements from chief executive...