BDCs win leverage cap increase after US$1.3trn budget signed

BlackRock TCP Capital

23/03/2018 19:37

By Leela Parker Deo
    NEW YORK, March 23 (LPC) - Business Development Companies
(BDCs) will gain access to additional capital to lend to small
and mid-sized businesses after language to increase the maximum
leverage allowed by the funds was added to a US$1.3trn
government spending bill President Trump signed into law on
Friday.
    The BDC language will permit the funds to employ leverage up
to two times total debt to equity, meaning they will be able to
borrow up to two dollars for every dollar of assets the fund
owns and thus make more loans to the businesses in which they
invest. Until now leverage for BDCs was capped at a ratio of 1:1
total debt to equity. The industry has been seeking change on
this front for more than five years.
    The omnibus spending bill needed to pass by midnight Friday
to fund government operations and federal agencies through
September. The US House of Representative passed the bill
Thursday, advancing it to the Senate, which voted for the bill
early Friday morning. Trump signed the bill later in the
afternoon, but not before threatening to veto the budget and
shut down the federal government.
    The addition of the BDC language on Wednesday, which had in
recent months garnered significant bipartisan support in both
houses of Congress, and its hard won victory on Friday are
widely seen by proponents as a win that will modernize the BDC
industry and provide more growth capital to small and mid-sized
companies. Legislative efforts to raise the leverage limit first
began in 2012 and gained traction in late 2013.
    Middle market businesses, often defined as companies with
between US$10m and US$1bn in annual revenues, are a major driver
of the US economy.
    The use of additional leverage will permit BDCs to pursue
higher quality deals with less associated credit risk, while
still generating competitive returns for their investors, market
participants and analysts said.
    The possibility of accessing more capital comes at a welcome
time for the BDC sector. In a highly competitive middle market
lending environment, the sector has faced headwinds.
    Some BDCs have struggled to grow or meet quarterly dividends
as new entrants and record levels of fundraising for middle
market direct lending and private credit strategies have put
tremendous pressure on borrowing rates and portfolio yields.
    Still, not all BDCs will necessarily have access to the full
2:1 leverage or opt to maximize leverage. Under the current 1:1
cap, BDCs, on average, utilize 0.71x leverage, according to a
Wednesday report by analysts Ryan Lynch and Paul Johnson at
Keefe, Bruyette & Woods.
    Certain BDCs stand to benefit more than others depending on
a range of factors, including the percentage of first-lien
investments, track record, portfolio size/platform, investment
grade rating, and current leverage utilized, the report said.
    The KBW analysts wrote in the report that they expect the
biggest beneficiaries to be Ares Capital Corp (ARCC), TCG BDC
(CGBD), FS Investment Corp (FSIC), Golub Capital BDC Inc (GBDC),
PennantPark Floating Rate Capital (PFLT) and TCP Capital Corp
(TCPC).
    Proposed legislation to increase the leverage cap was put
back on the table late last year after the US House Financial
Services Committee in November voted 58-2 to adopt H.R. 4267,
the Small Business Credit Availability Act.
    The language added to the government spending bill mirrors
the House bill as well as S. 2324, the Small Business Credit
Availability Act, which earned overwhelming bipartisan support
in the Senate, including 6 Republican and 12 Democrat
cosponsors, the Small Business Investor Alliance said in a
release on Thursday.

 (Reporting by Leela Parker Deo
Editing by Jon Methven)
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