Is BDCL’s 23% Payout That Good?

October 12, 2011

Is BDCL’s whopping 22.94 percent yield too good to be true?


UBS, the Swiss bank in the news recently for a $2.3 billion rogue-trading scandal involving ETFs, said this week the quarterly payout on its ETRAC’s 2X Leveraged Long Wells Fargo Business Development Company ETN (NYSEArca: BDCL) was 22.94 percent. That makes it the currently highest-yielding ETN in the ETP markets.

Is there a catch? The company’s claim is true if your entry point was Oct. 3, as the footnote in the table at the bottom of this story makes clear. But if you bought BDCL when it launched in late May, the yield was 15 percent—still eye-popping, yet more than 34 percent lower than the yield at the start of October. The key here is the price of the ETN, which has tumbled nearly 35 percent since it was issued at $25.

Like any common or preferred stock, or bond, the yield of BDCL is a function of the amount being paid out relative to the share price. The lower the share price, the better that yield looks. So, that attractive yield obscures a basic reality: Things are rough out there in the macroeconomy, and many investments are losing value.

There’s an inflection point beyond which falling prices no longer mean increasingly alluring dividend yields. To the contrary, they suggest it might be time to run for the exits. Just ask holders of Fannie Mae and Freddie Mac preferred who got seduced by sky-high dividend yields only to watch their investments turn worthless after the government took Fannie and Freddie into conservatorship in 2008.

To be sure, business development companies are, at their core, high-risk/high-reward propositions. Moreover, so-called BDCs are filling the breach left by regional banks, which, since the advent of the financial crisis, have pulled back on their lending to small and midsized companies. In other words, they have a place, and ETNs like BDCL make this pocket of finance accessible to those with nerves of steel.

The Case For BDCs

BDCs were created as public vehicles to invest in private equity and enable cash flows to such businesses. They often take equity stakes in the firms they invest in.

BDCs have been able to profit from the credit crunch that has been crippling many small businesses by charging relatively high interest rates for loans, which translates into higher dividend payments for shareholders in securities such as BDCL.

However, funding small and midsized companies in a shaky economy is a risky proposition. And while many BDCs are typically paying dividends on the order of 10 percent, most have lost significant value, and are trading below their book value.

ETRAC’s BDCL, which followed by a month UBS’ launch of a single-exposure BDC ETN, BDCS, has about $20.2 million in assets, compared with about $8.5 million for BDCS, the single-exposure version, according to data compiled by IndexUniverse.

BDCL was trading on Oct. 12 at $16.33, up almost 3 percent on the day, but down 34.7 percent since UBS brought the ETN to market.

The ETRAC’s ETN tracks all of the market-capitalization-weighted Wells Fargo Business Development Company Index, which consists of 26 names with a market capitalization of greater than $100 million.


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