American Capital Ltd. (ACAS): Rising Interest Rates Don’t Scare These BDCs

Interestingly, management sees competition among the 40-plus BDCs, by their count, now in existence as more of a threat than interest rate — though American Capital Ltd. (NASDAQ:ACAS)’s diverse business model should be able to help dilute risks in both areas.

Know the risks
Though each of these companies are taking the necessary steps to thrive throughout the QE3 taper and exit, the inherent risk in this particular business model might make some investors nervous. While Prospect Capital Corporation (NASDAQ:PSEC)’s recent presentation makes note of its tendency to gravitate toward more high-quality lending laden with lender protections, not all may be as discerning.

This past March, an analyst from Wells Fargo & Co (NYSE:WFC) voiced two major concerns regarding the sector: higher leverage, and the increasing involvement in covenant light loans, with few or no safety clauses for lenders and investors. Knowing how a particular BDC runs its business can go a long way toward alleviating investor worries, especially during times of market upheaval.

Fool contributor Amanda Alix has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of Wells Fargo.

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