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What to Expect from Closed-End Fund Earnings and Consolidation in 2016


Jun. 28 2016, Updated 1:04 p.m. ET

Expected earnings

BlackRock Capital Investment (BKCC) is expected to report EPS (earnings per share) of $0.25 in the June quarter, which would mean a 3% growth to $1.00 EPS for the year. This growth will be primarily backed by lower costs and a revenue estimate of $125 million, representing a negative growth of 4% on a YoY (year-over-year) basis.

We should note that originations have been an issue for closed-end funds as there is ample liquidity in the markets. There’s also competition for lending to strong middle-market companies having higher yields.

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By comparison, Ares Capital (ARCC) is expected to report EPS of $0.38 in the June quarter and EPS of $1.55 in fiscal 2016. Ares Capital is expected to improve its yields by investing in the second-lien debt of companies with strong earnings profiles. The company is also focusing on joint ventures to boost its originations. It recently bought American Capital (ACAS) for $3.4 billion, and the latter is expected to post $0.28 in EPS for the quarter and $1.23 in EPS for the full year.

In the end, closed-end funds (PEX) will be tested on a quality of their portfolios. Companies with higher leverage and lower grade investments will see discounted valuations.

Marginal growth in 2016

Prospect Capital (PSEC) has a positive outlook for consumer credit throughout 2016 on the back of falling unemployment rates and commodity prices. The company deployed $2 million during the March quarter into NPRC in support of the online consumer lending initiative. Its financial services holdings are returning an annualized yield of 18%–30%, reflecting strong demand for consumer credit.

Prospect expects to continue with high dividend yields, as earnings are expected to be around $1.04 on a per-share basis during the next year. By contrast, CIT Group (CIT) is expected to see a decline in EPS to $3.40 on the acquisition of banking assets.

In the next and final part of this series, we’ll look at further strategies that these closed-end funds plan to employ in 2016.


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