This week we continue our conversation with Greg Mason and Troy Ward, managing directors with KBW’s North America Equity Research team. Messrs. Mason and Ward specialize in business development company research. 

Second of two parts – View part one

The Lead Left: What about financing costs? How do lenders to a BDC figure out what to charge?

Troy Ward: It’s very much differentiated by manager. You can’t rely solely on bank revolvers, you need a variety of back-stops including unsecured notes and securitizations. Ares just did a five-year unsecured note at 4%, as did FSIC (GSO/Blackstone). Smaller managers are issuing at 6-7%. Golub can do a securitization with AAA’s priced at L+175 and be match-funded against the life of the assets.

TLL: What’s the outlook for new BDCs this year?

Greg Mason: Unless the BDC sector sees a big improvement soon, I don’t think there will be any IPO’s until 2015. BDC stocks have gotten hammered of late; these stocks are trading below NAV (net asset value). I suspect there will be a smattering of secondary offerings.