BUSINESS EVELOPMENT OMPANIES · and distributions (similar to REITs and MLPs) o To maintain...

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THE OF BDCS (BUSINESS DEVELOPMENT COMPANIES) John Cole Scott, CFS Chief Investment Officer ClosedEnd Fund Advisors, Inc June 29, 2016 ClosedEnd Fund Advisors is a Registered Investment Advisory Firm Specializing in ClosedEnd Fund & BDC Research, Trading and Management Founded in 1989

Transcript of BUSINESS EVELOPMENT OMPANIES · and distributions (similar to REITs and MLPs) o To maintain...

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THE OF BDCS(BUSINESS DEVELOPMENT COMPANIES)

John Cole Scott, CFSChief Investment Officer

Closed‐End Fund Advisors, Inc

June 29, 2016

Closed‐End Fund Advisors is a Registered Investment Advisory Firm Specializing in Closed‐End Fund  & BDC Research, Trading and Management Founded in 1989

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Important: The information in this presentation is not for general circulation and should not be consideredan offer, or solicitation, to deal in any of the mentioned funds. The information is provided on a generalbasis for information purposes only, and is not to be relied on as advice, as it does not take into accountthe investment objectives, financial situation or particular needs of any specific investor.

Any research or analysis used to derive, or in relation to, the information herein has been procured byClosed‐End Fund Advisors (“CEFA”) for its own use, and may have been acted on for its own purpose. Theinformation herein, including any opinions or forecasts has been obtained from or is based on sourcesbelieved by CEFA to be reliable, but CEFA does not warrant the accuracy, adequacy or completeness of thesame, and expressly disclaims liability for any errors or omissions. As such, any person acting upon or inreliance of these materials does so entirely at his or her own risk. Any projections or other forward‐lookingstatements regarding future events or performance of countries, markets or companies are not necessarilyindicative of, and may differ from, actual events or results. No warranty whatsoever is given and no liabilitywhatsoever is accepted by CEFA or its affiliates, for any loss, arising directly or indirectly, as a result of anyaction or omission made in reliance of any information, opinion or projection made in this presentation.

The information herein shall not be disclosed, used or disseminated, in whole or part, and shall not bereproduced, copied or made available to others without CEFA expressed written permission. CEFA reservesthe right to make changes and corrections to the information, including any opinions or forecastsexpressed herein at any time, without notice. Data comes from our CEF Universe service dated June 17,2016 unless otherwise noted.

2www.CEFadvisors.com

Disclosures

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What Is CEF Advisors?

• Investment Management, Research & Data• Independent, Fee Only & Family Owned • “Scott Letter: Closed‐End Fund Report”• Discretionary Portfolio Management (SMA), 

Unit Investment Trust (UIT) Portfolio Consultant • Covestor Models (Robo Advisor) Muni & BDC• CEF & BDC News/SEC Alert & “CEFA’s Closed‐End Fund Universe”• Consulting with Institutional Investors and CEF Fund Sponsors • CEFData.com: CEF/BDC Web Modules with Daily Data

We seek to be the crossroads of BDC/CEF data, trends and news. We maintain strong relationships with Managers, Peers, Analysts and Fund Sponsors.

www.CEFadvisors.comFounded in 1989

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What is a Business Development Company (BDC) ?

o Tax‐advantaged and earnings are passed through to investors in the form of dividends and distributions (similar to REITs and MLPs)

o To maintain Regulated Investment Company (“RIC”) status, BDCs must distribute at least 90% of taxable income to shareholders. 

o Limited to 200% asset coverage (total assets / total debt) or “one turn” of leverage, excluding SBIC facilities. 

o BDCs have grown dramatically since the Financial Crisis with 29 IPOs because traditional banks have generally reduced their focus on small business lending. 

Source: Sutherland Asbill & Brennan, Triangle CapitalData from CEFdata.com June 24, 2016

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o Created by Congress in 1980 to provide an opportunity for individual non‐accredited investors to participate in private investments

o Publicly traded closed‐end funds that provide small, growing companies access to capital

o Domestically focused and required to offer portfolio companies ‘managerial assistance’.

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BDCs Provide Access to Private Debt Investments

Retail and Institutional

Investors

Investment Dollars

Dividends to Investors

Debt Investments

(Primarily)

Interest and Dividends

BDCs

Small and Middle-Market Businesses

Shareholders taxed on dividends

No tax paid at this entity

$ $

$ $

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o Public financial information through in‐depth quarterly reportingo BDC Portfolios are typically diversifiedo Reduces risk typically associated with private equity or debt investmentso Generally focused on “middle market” lending which has historically lower default rates and higher recovery rates, offering downside protection

o SEC restrictions on leverage (debt/borrowing) levels prevent BDCs from becoming over leveraged

www.CEFadvisors.com 6

o Provide retail investors with access to high yielding, private market investments historically only available to large institutional investors  

o ‘Permanent Capital’ for long‐term investment horizono Shares traded on national exchanges, providing daily 

investment liquidity 

Benefits of BDCs

Source: Sutherland Asbill & Brennan LLP, Triangle Capital

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Debt‐Focused BDCs Total Return

‐60

‐40

‐20

0

20

40

60

4/1/2006 4/1/2007 4/1/2008 4/1/2009 4/1/2010 4/1/2011 4/1/2012 4/1/2013 4/1/2014 4/1/2015

BDC Debt ‐ Total ReturnApril 1, 2006 ‐March 31, 2016`

NAV TR Price TR

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Debt‐Focused BDCs Discount

‐60

‐50

‐40

‐30

‐20

‐10

0

10

20

30

40

3/1/2006 3/1/2007 3/1/2008 3/1/2009 3/1/2010 3/1/2011 3/1/2012 3/1/2013 3/1/2014 3/1/2015 3/1/2016

BDC Debt ‐ Average Discount / PremiumApril 1, 2006 ‐March 31, 2016

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BDC Yield Comparison

BDC Data as of 6/24/2016, Index Data as of 3/31/2016MLP Index:  Alerian MLP Index; REIT Index: Wilshire US REIT Index;  Corporate Debt Index: S&P 500 Bond IndexUS High Yield Indices : BofA Merrill Lynch US High Yield (BB Rated, B Rated, CCC and Lower Rated )

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4.7%

20.9%

37.2%

37.2%

Yield Under 6%

Yield 6%-8%

Yield 8% -10%

Yield 10% - 12%

Yield Over 12%

Note: 43 Debt Focused BDCs; data as of 6/24/2016 , cefdata.com

13www.CEFadvisors.com

Debt‐Focused BDCs By Yield

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1. Discount Direction: BDCs trade at prices in relation to thequarterly net asset value (NAV). NAVs are the ‘anchor point’for BDC pricing. We seek BDCs where discounts can recoveror are sustainable vs. potential to widen dramatically. Smallpremiums can be healthy for a BDC.

www.CEFadvisors.com

2. Dividend Sustainability: Research the reoccurring income produced by a BDC (Adj CoreNII coverage avg 105%*) as well as trends in the sector and the past policies of the BDC.Dividends are policies from the BoD are not promises like coupon payments on bonds orthe BDC loans themselves. Review Libor floors, and use of fixed vs. variable leverage.

3. NAV Total Return: Manager performance after costs is important as poor results oftenimpact the price investors use as the ‘anchor point’ for BDCs. This also helps confirmthat management can produce investment returns after their cost. BDC loan creation isnot typically a cheap and easy task, but shareholders need to know that managementcosts are in check with their results. Avg BDC NonLev Expense Ratio: 5.2%*

CEFA’s BDC ‘Trifecta’ Analysis

CEFA feels that getting any of these items wrong can negate good investment research 

*Data as of 6/24/16 CEFdata.com

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1. Traditional Leverage is capped at a 1:1 ratio2. SBIC Debentures (19 BDCs have them) through the 

SBA offer cheap fixed cost leverage for additional investments

3. Fixed Leverage (43.4%) vs. Variable Leverage (56.5%)4. Baby Bonds, Convertible Bonds, Institutional 

Bonds, Credit Facilities, and Private Notes

www.CEFadvisors.com

Leverage Used by BDCs

• Average BDC leverage amount: 43.5% ($1.435 in Gross Exposure per NAV for each BDC)

• Average relative cost for all leverage: 3.78%• Average debt‐to‐equity ratio: 0.82 (regulatory 

maximum is 1 not including a SBIC)

*Data as of 6/24/16 CEFdata.com

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1. First Lien Loans: 54.8%2. Second Lien Loans: 19.5%3. Unsecured Loans: 11.7%4. Equity/Other: 14.0%

www.CEFadvisors.com

Types of Loans Held By BDCs

Avg Portfolio Turnover: 23.4% Avg Variable Loans: 76% / Fixed: 24% Libor Floors: 42% at 1.07% Avg Level Avg Loan Size: $10.7M  74% of Loans Under $25MM Average Maturity 4.1 with a range of 2 Years to 6 years Avg No of Loans: 108 from 94 Companies

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Current Public BDC Average Data

Data as of 6/24/2016 Source: cefdata.com

Current Discount ‐12.2% Non Accrual 1.9%

3 Year Avg Discount ‐3.3% 3 Year Avg Non Accrual 1.1%

3 Year % Days Premium 36.0% Energy % 4.6%

3 Year Discount Low ‐29.4% CLO % 1.9%

3 Year Discount High 17.7% 2 Year Beta 0.72

3 Year Rel Price Range 32.7% Avg No Employees 67

Market Yield 11.9% Employee to Co Ratio 2.5

Leverage % 43.5% Institutional Ownership 29.6%

Debt/Loan Investments 88.9% Insider Ownership 9.7%

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1. Credit Risk2. Discount Risk3. Dividend Risk4. Poor Fee / Investor Alignment5. Quarterly NAV, subjective fair value estimates 

could take sudden and quick losses6. Market Prices can be volatile during earnings 

season or on headline risk / risk off trading. 7. Libor floors, variable leverage, spread widening

www.CEFadvisors.com

Potential Risks of BDC Investing

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How Have BDCs Faired in a Rising Rate Environment?

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BDC Historical IPOs

20www.CEFadvisors.com

Source: SEC Filings, Press Releases

2015 2014 2013 2012 2011 2010 2009 2008 2007 2006

Number of IPOs 1 6 4 5 7 5 1 1 5 1

Average Assets

In $ millions$120 $575 $78 $96 $101 $98 $87 $141 $138 $203

Total New CEFIPO Assets in $ 

Billions$0.1 $3.5 $0.3 $0.5 $0.7 $0.5 $0.1 $0.1 $0.7 $0.2

10 Year Average:  3.6 Funds per year,  $164M Ave Fund, $0.7 Billion Per Year

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Note: This portfolio is an equal weight portfolio of the 10 most liquid BDCs by 90 days average trade volumes on June 17, 2016 from CEFdata.com and is not a recommendation to buy or sell any BDC listed on this slide.  21

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• BDC loans are typically variable in nature, offering a good chance to increase income when interest rates eventually rise  • BDCs are generally diversified by sectors, geography and most contain 50‐150 separate companies in the portfolio • BDCs are dually regulated by FINRA and the SEC and contain independent board of directors • BDCs have regularly traded above NAV, providing extra potential up‐side performance from current discount levels 

Full list of Public BDCs at www.BDCUniverse.net

• You can be selective with 40+ options• Lack of recent IPOs can help improve demand for shares of current BDCs• BDC loans are typically secured which can liekly offer better downside protection when there is economic, sector or company risk

Opportunity for BDC Investing Today

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Open‐End Fund / Mutual FundACR BDC Income Fund (BDCCX)

Unit Investment Trust (UIT)AAM “Business Development Company Opportunities Portfolio, 2016‐2” (AAMOTX)Nuveen “Prospect Income Finance Portfolio 2016‐02” (NVPIFX)SmartTrust UIT “CEFA’s Select BDC Trust 6” (SMBDFX) 

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Closed‐End Fund (CEF)First Trust Specialty Finance & Financial Opportunity Fund (FGB)

Exchange Traded Fund (ETF)ETracs Wells Fargo BDC ETN  (BDCS)ETracs Wells Fargo BDC ETN 2X – (BDCL)VanEck Vectors BDC Income ETF (BIZD)

Open‐End, Closed‐End, ETF and UIT BDC Offerings (1940 Act)

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Data Comparison for BDC Focused Funds (40 Act)

Please see “Additional Disclosures” at the end of this presentation. Data from CEFdata.com as of June 24, 2016

All Debt BDCs

Financial Opportunity Fund 

(FGB)

ETracs Wells Fargo BDC ETN  (BDCS)

VanEck Vectors BDC Income ETF 

(BIZD)

ACR BDC Income Fund (BDCCX)

AAM “BDC Opp Portfolio, 2016‐2” 

(AAMOTX)

Nuveen “Prospect Income Finance 

Portfolio 2016‐02” (NVPIFX)

SmartTrust UIT “CEFA Select BDC Trust 6” (SMBDFX)

Type BDC CEF ETF ETF OEF UIT UIT UIT# BDCs in Portfolio 43 32 43 26 17 25 22 11% Exposure to BDCs 100 87.7 100 100 91.4 100 90.06 100Current Discount ‐12.2 ‐5.2 ‐6.3 ‐5.3 ‐14.7 ‐9.8 ‐14.7 ‐4.21 Yr Avg Discount ‐14.1 ‐8.1 ‐9.7 ‐8.3 ‐16.3 ‐14.2 ‐15.2 ‐5.73 Yr Avg Discount ‐3.3 3.4 ‐1.2 0.4 ‐3.2 ‐2.0 ‐0.6 ‐1.6Mkt Yield of BDCs 11.9 10.8 9.8 9.8 11.5 11.0 12.2 10.5Lev Adj NAV Yield 7.1 6.9 6.3 6.3 6.9 6.8 7.0 7.0% Leverage 43.5 42.0 39.9 40.0 40.6 41.5 43.1 40.7Rel Leverage Cost 8.8 8.7 8.5 8.5 8.7 8.8 8.8 8.2Adj Core NII Cov % 101.4 100.2 100.6 99.8 105.7 104.6 96.9 111.3% BDC Loans in Portfolio 88.9 87.9 84.0 84.5 91.6 87.8 90.1 92.1% 1st Lien 54.9 48.1 49.0 46.9 60.7 54.2 57.5 59.0% 2nd Lien 19.5 25.7 20.7 23.6 18.5 18.4 20.9 23.6% Variable Loans 75.8 77.7 68.9 71.7 77.9 73.2 76.5 80.01 Year NAV TR 1.3 4.2 2.8 3.2 2.6 3.9 1.7 5.23 Year NAV TR 18.6 25.2 24.1 25.5 21.2 24.3 23.0 27.7% CLO 1.9 0.6 2.4 2.1 1.1 1.3 0.7 1.2% Energy 4.6 4.4 5.6 5.8 2.5 3.4 4.8 4.3# of Companies 94 105 119 125 84 84 88 86# Loans 108 126 139 147 98 98 102 111

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• Professional Tactical Separate Account Management: $1MM Household Minimum, 1% Fee by CEFA

• SmartTrust UIT “CEFA Select BDC Trust Series 6”: $1000 minimum purchase, 0.50% creation & development fee for non‐commission cusip.

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CEF Advisors’ BDC Services and Portfolio Options

• Covestor “Yield Animal” BDC Model: $15,000 minimum account size, 0.50% fee

• Daily CEF/BDC News & SEC Filings Alerts: $156 per year

• Weekly CEF/BDC Universe Data: $1240 per year

• CEFData.com: Daily Access to Modules for Fund Screening and Portfolio, Model and Watch List Monitoring: $1K ‐ $4K per quarter depending on subscriber classification.

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John Cole Scott, CFSEXPERIENCECIO of Registered Investment Advisor Focused Exclusively on CEFs and BDCs since 2001

EDUCATIONCollege of William & MaryBachelor of Science in Psychology 2000

John Cole Scott, CFSChief Investment Officer of Closed‐End Fund Advisors

Mr. Scott has worked at Closed‐End Fund Advisors since 2001. He sits onthe firm’s investment committee and holds the FINRA 66 License and theCertified Fund Specialist designation (CFS). He is a graduate of The Collegeof William and Mary and has been quoted and interviewed widely in thefinancial press and presented at conferences and for investment groups onmore than 40 occasions.

In 2008 John founded CEFA's Closed‐End Fund Universe, a comprehensiveweekly data service covering 240+ data points for all US listed closed‐endfunds and 210+ for BDCs. He also founded and manages The CEF Networkgroup on LinkedIn and is editor of the firm’s blog. John is a past boardmember of The Richmond Association for Business Economics (RABE), andserves on the Investment Committee for The New York State Society of TheCincinnati.

www.CEFadvisors.com

Speaker’s Biography

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Additional DisclosuresCEFData.com makes data for the universe of closed‐end funds (CEFs) and business development companies (BDCs) available to its users. This material is notintended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be consideredspecific legal, investment or tax advice. This site does not list all the risks associated with each fund. Investors should contact a fund’s sponsor for fund‐specificrisk information and/or contact a financial advisor before investing.

Distribution type sourced from CEFdata.com. For specific information about a fund's distribution sources, visit the fund sponsor's website. The followinginformation applies to closed‐end funds and business development companies in general: Fund shares are not guaranteed or endorsed by any bank or otherinsured depository institution, and are not federally insured by the Federal Deposit Insurance Corporation (FDIC). Shares of closed‐end funds (CEFs) and businessdevelopment companies (BDCs) are subject to investment risks, including the possible loss of principal invested. There can be no assurance that fund objectiveswill be achieved. Closed‐end funds and business development companies frequently trade at a discount to their net asset value. NAV returns are net of fundexpenses, and assume reinvestment of distributions.

This material is presented for informational purposes only. Under no circumstances is it to be considered an offer to sell, or a solicitation to buy any investmentreferred to on this page. While the information contained herein is from sources believed reliable, we do not represent that it is accurate or complete and itshould not be relied upon as such. Past performance is not necessarily indicative of future results. All investments involve risk including the loss of principal.Returns are presented gross of investment management fees and other appropriate fees (i.e. commissions, custodial fees, etc.).

© Closed‐End Fund Advisors Inc.(CEFadvisors) and CEFdata.com 2016. All rights reserved. Any copying, republication or redistribution of CEFadvisors,CEFdata.com, content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of CEFAdvisors. CEFAdvisors shallnot be liable for any errors or delays in the content, or for any actions taken in reliance thereon.

SmartTrust “CEFA Select BDC Trust” Series 6 UIT [ https://www.smarttrustuit.com/trust/smbdfx/]Investors should consider the trust’s investment objective, risks, charges and expenses carefully before investing. The prospectus contains this and other information relevant to an investment in the trust. Please read the prospectus carefully before you invest. If a prospectus did not accompany this literature, please contact SmartTrust at (888) 505‐2872 to obtain a free prospectus. 

Hennion & Walsh is a member of FINRA/SIPC. 2001 Route 46, Waterview Plaza, Parsippany, NJ 07054 (888) 505‐2872 www.smarttrustuit.com NOT FDIC INSURED • NOT BANK GUARANTEED • MAY LOSE VALUE 

Page 29: BUSINESS EVELOPMENT OMPANIES · and distributions (similar to REITs and MLPs) o To maintain Regulated Investment Company (“RIC”) status, BDCs must distribute at least 90% of taxable

Closed‐End Fund Advisors, Inc

7204 Glen Forest Drive, Suite #105Richmond, Virginia 23226 U.S.A(800) 356‐3508 / (804) 288‐2482

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