Brexit: No High-Yield Panic Yet

Brexit anticipation and fear ran high on Friday morning. There was fear of a market meltdown, but also anticipation of picking up some high yield bargains. A record number of Panick Value Research Report members were logged in with eyes glued to the chat board. They were eager to exchange ideas as "flash crash" type bargains materialized. It was a dud. Despite the 600 point plus decline in the Dow, most high yield issues (with a few notable exceptions) held their ground remarkably well. The prospect of "lower for longer" interest rates appears to be offsetting fears of a weaker global economy. Here are some observations on why some high yield sectors and issues might be hit harder than others by Brexit.
Why were BDC issues down much less than banks?
Most BDC investors breathed a sign of relief as BDC issues such as Prospect Capital Corporation (Nasdaq: PSEC), Fifth Street Finance (Nasdaq: FSC) and Apollo Investment (Nasdaq: AINV) only fell about 1% on Friday. This was a far better performance than the banking sector. Many domestic banks fell 5% or more. There were far larger losses for European banks such as Barclays PLC (NYSE: BCS) which plummeted 20%. Why did BDC's fare better than most financial sector peers?
BDC balance sheet leverage is restricted. A BDC's total regulatory debt-to-total equity ratio cannot surpass a 1:1 level. A typical bank has a comparable leverage ratio of 6X to 10X. Less balance sheet leverage means less volatility in... Read more