<aside> 📌 The STAR approach is a technique to help structure responses to questions effectively. STAR stands for Situation, Task, Action, and Result.
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3/17/2023
Bank crisis across US
Ares Capital (crashes in 2 days from $19.x to 17.4) is the world's largest BDC by market capitalization, similarly:
I am not a financial advisor, but I can provide some general information that may help you think about this scenario.
If banks fail across a country, it could indicate a significant financial crisis or economic downturn. In such a situation, the performance of many businesses, including business development companies (BDCs), could be negatively impacted. BDCs generally provide financing and managerial assistance to small and mid-sized companies, and if the broader economy is struggling, these companies may face challenges as well.
However, it's important to remember that every financial crisis and economic downturn is different, and the performance of specific BDC stocks will depend on a variety of factors, such as the quality of their portfolio, management team, and overall market conditions.
In times of economic uncertainty, some investors may choose to sell their BDC stocks to reduce their exposure to riskier assets, while others may view it as an opportunity to buy stocks at a lower price in anticipation of a potential recovery.
Wall Street received a painful reminder last year that the stock market isn't a free-money machine. Stocks don't always march higher, and the risk of declines, if perhaps only temporary, are very real. Dividends, however, allow you to realize consistent cash returns and avoid the need to sell at inopportune times – and few areas of the market produce higher dividends than the best BDC stocks.
BDCs make debt and equity investments primarily in "middle market" companies that are generally a little too big for bank financing but not quite big enough to go public via an initial public offering (IPO). They invest in the proverbial Main Street … or at least, this is as close to Main Street as Wall Street gets.
Like their cousins, real estate investment trusts (REITs), BDCs were created by Congress to encourage investment in the real economy, and both benefit from preferential tax treatment, paying no income tax at the corporate level so long as they pay out at least 90% of their net income as dividends.
Remember: Business development companies are required to pay out at least 90% of their earnings as dividends. But BDC earnings can be cyclical. So, whenever earnings take even a short-term hit, many BDCs are put in the unfortunate position of having to choose between funding the dividend with debt or cutting it.