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Analyst: GE Capital Sale Stirs Pot For Business Development Companies

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General Electric Company (NYSE: GE)'s pending sale of its GE Capital unit is creating opportunities for publicly traded business development companies, an analyst said Monday.

The closed-end investment companies, or BDCs, typically invest in small and mid-sized businesses in a manner sometimes likened to private equity or venture capital firms.

The planned sale of GE Capital "is a net positive to the industry," according to SunTrust analyst Doug Mewhirter.

"Disruption at the largest player is beginning to create openings for BDCs to exploit," Mewhirter said.

Business development companies that Mewhirter especially likes include Solar Capital Ltd. (NASDAQ: SLRC), TPG Specialty Lending Inc (NYSE: TSLX) and Fifth Street Finance Corp. (NASDAQ: FSC).

GE said in April it would sell most of its $500 billion financial operations by 2018, immediately announcing the sale of more than $26 billion in real estate assets.

GE recently began accepting bids for part of its U.S. commercial-lending business, worth an estimated $40 billion, according to a report Sunday by The Wall Street Journal.

Among business development companies, Mewhirter said there is currently "a two-tiered market" divided between "clean" and "risky" BDCs.

Clean companies have more senior portfolios with little energy exposure and may offer strong dividend coverage.

Risky players have been hurt by plunging oil prices and, in some cases, dividend cuts or below-average earnings.

TPG Specialty Lending is in the clean tier, "with very strong earnings power and growth potential," according to Mewhirter.

Solar Capital "remains our top 'risky' idea," Mewhirter said. "It's putting together the pieces to finally regrow its portfolio."

Fifth Street Finance, in Mewhirter's "risky" category, needs "a few clean quarters" to help the stock's gap relative to the company's net asset value, according to the analyst.

Mewhirter said the recent quarter has been "very quiet" for the sector, with most companies reporting little in the way of new financing deals.

A couple of exchange traded funds in the sector have performed poorly of late.

The Market Vectors BDC Income fund (NYSE: BIZD) is off about 2 percent in the past three months; the UBS E-TRACS Wells Fargo Business Development Co. fund (NYSE: BDCS) lost about 1.6 percent in the same period.

Latest Ratings for GE

DateFirmActionFromTo
Oct 2020Deutsche BankMaintainsHold
Oct 2020Morgan StanleyMaintainsOverweight
Oct 2020UBSMaintainsBuy

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