PennantPark Investment (Nasdaq:PNNT), MCG Capital (Nasdaq:MCGC)

FBR Capital considers PennantPark Investment (Nasdaq:PNNT) and MCG Capital (Nasdaq:MCGC) as the top BDC picks for 2011, with PennantPark their top pick and MCG picked on valuation.

FBR said, "We expect that the positive momentum we witnessed in 2010 in the business development company (BDC) space will continue into 2011 against a backdrop of improving credit quality and business fundamentals and a strong pipeline of originations. Relative to historical levels, BDCs as a group are under-levered at 0.53x debt to equity, versus 0.7x historically, which allows them to take advantage of the market opportunity ahead of them. Investment spreads remain attractive relative to pre-crisis levels, which, coupled with portfolio churn into interest-earning investments (from non-earning equity investments), will drive NOI and dividend visibility.

"Given the low interest rate environment, we also expect that investors will gravitate toward these attractive yields that average 9% today. We believe that these dividend streams are generally sustainable with the potential for growth as our thesis plays out. The funding environment looks favorable, as many BDCs have access to equity and debt capital markets, bank lines, and inexpensive long-term funding from the Small Business Administration (SBA).

"Overall, we expect that these positive attributes will result in multiple expansion for the group. Specific to our coverage, we prefer companies that are best positioned to exploit the market opportunity ahead. PennantPark Investment Corporation (Outperform) is our top idea headed into 2011 within our coverage universe. On valuation, we like MCG Capital Corporation (Outperform)."

PennantPark Investment closed Friday at $12.70, up $0.26, or 2.09 percent. MCG Capital closed Friday at $7.23, up $0.09, or 1.26 percent.