Rising Rates Driving Higher Earnings In The High-Yield BDC Sector

Interest Rate Sensitivity "Interest rate sensitivity refers to the change in earnings that may result from changes in the level of interest rates. Because we fund a portion of our investments with borrowings, our net investment income is affected by the difference between the rate at which we invest and the rate at which we borrow. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income."
That is how most Business Development Companies ("BDCs") describe the interest rate risk section of the "Quantitative and Qualitative Disclosures About Market Risk" section in the financials that is usually followed with some detail indicating how the company would be impacted by rising interest rates.
For subscribers of "Sustainable Dividends", I recently analyzed the impact to earnings for 23 BDCs, mostly focused on the likely scenario of a 100 points (1%) increase in underlying rates, and then ranked each company by change in annual net investment income ("NII").
As discussed in "Rising Interest Rates And BDCs," the following are the core drivers that impact a BDC's net investment income as interest rates rise:
Amount of variable rate debt investments Interest rate floors for variable rate investments (most important) Fixed vs. variable rate borrowings Income incentive fees Growth capital (variable rate debt vs.... Read more