The BDC sector is expected to enjoy strong returns in the current stage of the corporate credit cycle, where corporate defaults are going to run well below their historical levels over the next several quarters, regardless of GDP growth, says Matt Howlett, a Vice President at Macquarie Group.
“Our thesis is that corporate credit defaults or higher defaults are going to run well below 2% in the next two to three years, I should say the broader leverage loan market below 2%, default rates over the next two to three years,” he said. “That would be 50% of the long-term average of 4% and about 20% of where they peaked up in 2008.”
Howlett favors American Capital, Ltd. (ACAS), although the company is not paying a dividend right now. He says he believes ACAS is overlooked by a lot of people in the space, given BDCs typically pay a dividend, however the company is returning capital through buybacks, and it’s deleveraging and paying down some of its debt.
“We think when the company is fully done deleveraging or paying down their debt, they’re going to be in position to really access the financing markets in a unique way that will be able to lift earnings and resume the dividend and resume capital raising,” Howlett said.