Just a month ago, UBS introduced the first ETP focusing on Business Development Companies. Now they are upping the ante with a leveraged version. The UBS ETRACS 2x Leveraged Long Wells Fargo Business Development Company ETN (BDCL) began trading 5/25/11, will reset its leverage monthly, and will pay a quarterly coupon.
The underlying index of 26 BDCs (Business Development Companies) has a current annual yield of 7.8%. The leveraged yield for BDCL is projected to be 14.6%, net of estimated annual expenses of 1.11% (tracking and financing fees). This makes BDCL the highest-yielding coupon-paying ETP on the market, taking the title away from UBS ETRACS 2x Leveraged Long Alerian MLP Infrastructure Index ETN (MLPL), which currently sports a yield of 11.6%.
Business Development Companies are publicly traded entities that invest in private equity and debt, similar to private equity funds. To qualify as a BDC, the company must be registered with the SEC and agree to regulation as a BDC under the Investment Company Act of 1940.
The typical BDC lends capital to small and mid-sized companies at relatively high rates while often taking equity stakes. Similar to venture capital firms, BDCs often take an active role in guiding their investee companies. The debt/equity combination of their investments offers the potential for relatively high, stable cash distributions with an equity kicker.
According to index sponsor Wells Fargo Securities, the index is a float adjusted, capitalization-weighted index. However, with the three largest holdings all having exactly 10.0% allocations, it appears to be a “capped” index. Wells Fargo says its index will try to measure the performance of all BDCs listed on the NYSE or NASDAQ.
The index’s 26 current holdings are Ares Capital Corp (ARCC) 10.0%, American Capital Ltd (ACAS) 10.0%, Apollo Investment Corp (AINV) 10.0%, Prospect Capital Corp (PSEC) 9.6%, Fifth Street Finance Corp (FSC) 7.0%, Solar Capital Ltd (SLRC) 6.2%, BlackRock Kelso Capital Corp (BKCC) 5.8%, PennantPark Investment Corp (PNNT) 4.7%, MCG Capital Corp (MCGC) 4.1%, and Main Street Capital Corp (MAIN) 3.3%.
The monthly leverage reset will reduce – but not eliminate – the negative impacts associated with the compounding and rebalancing of leverage. An an exchange traded note (“ETN”), BDCL is subject to the unsecured credit risk of its issuer, UBS. The 14.6% yield is not guaranteed, and principal risk is substantial due to leverage as well as the normal risks of the underlying index. Do not become mesmerized by yield. Potential investors should understand what they are getting into and have a plan to manage these risks.
Additional information can be found in the press release, the BDCL summary page, fact sheet (pdf), and prospectus (pdf).