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House Committee Advances BDC Reform Bill to Expand Middle-Market Lending

November 20, 2017, 08:00 AM
Filed Under: Regulatory News

The U.S. House Financial Services Committee approved by a wide margin, a bipartisan measure to loosen restrictions on Business Development Companies that lend to small businesses and the middle market.

Introduced by Representatives Steve Stivers (R-OH), Gwen Moore (D-WI), Patrick McHenry (R-NC), and Brad Sherman (D-CA), the “Small Business Credit Availability Act” amends the “Investment Company Act of 1940” to modernize the regulatory regime for business development companies (BDCs) for the first time since the 1980s. BDCs are investment vehicles designed to facilitate capital formation for small- and middle-market companies. The legislation requires the SEC to streamline the offering, filing, and registration processes for BDCs to eliminate significant regulatory burdens and increases a BDCs’ ability to deploy capital to businesses by reducing its asset coverage ratio—or required ratio of assets to debt—from 200% to 150% if certain requirements are met.

The bill passed the committee last week by a vote of 58-2.

“Unfortunately, in recent years, we have seen banks cut back on lending to small and mid-sized businesses, making BDCs an even more important resource to our job creators,” Stivers said. “We must make it easier for BDCs to provide financing to these businesses so they can continue to create jobs in our communities.”

Over half of all BDCs are publicly traded, allowing retail investors an opportunity to invest in small and middle market companies on Main Street. However, despite their growing importance, the regulatory policies that govern them have remained largely unchanged since their creation over 30 years ago.

BDCs were created by Congress to fill the void left after banks slowed lending to small businesses following losses in oil and real estate investments in the 1970s.  BDCs are required to invest at least 70 percent of their assets into private operating companies and publicly traded firms that are valued at less than $250 million – which includes middle market businesses.  As a result, BDCs have become an important source of financing for these businesses, which employ nearly 48 million Americans and are responsible for approximately one-third of our nation’s gross domestic product (GDP). 

“This is one of the few bills, financial services-related or otherwise, that has broad-based support across the full spectrum on both sides of the aisle. The vote showed support from the left, right and center, and from representatives in leadership roles,” said Mike Gerber, executive vice president corporate affairs, at asset manager FS Investments, commenting on the bill for Reuters.
“The exceptionally strong bipartisan vote was the result of Members of Congress working together to support small and medium-sized businesses. The strong support of this legislation underscores the belief by Members of Congress that if BDC legislation can be passed, the BDC industry will be able to play a larger role in providing capital to small and medium sized companies,” said Brett Palmer, President of the Small Business Investor Alliance. “We urge both Houses of Congress to continue this forward progress and deliver the vital reforms needed by the BDC industry that, in turn, will provide substantial benefit to domestic small businesses and local economies across the country.”

Among the key provisions of the legislation are streamlining the BDC offering process, updating proxy rules, and expanding access to capital by changing the “asset coverage ratio.” These and other priority reforms are part of the SBIA Capital Formation Agenda for BDCs detailed in the SBIA BDC Modernization Agenda. SBIA endorsed this bill and lobbied for its passage. This is the third piece of legislation from the SBIA Capital Formation Agenda that has passed a major Committee in Congress this year. SBIA members Vince Foster with Main Street Capital Corporation and Michael Gerber with Franklin Square Capital Partners testified before Congress earlier this year in support of BDC modernization.

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