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Fitch: BDC Unsecured Issuance Bolstering Funding Flexibility

April 10, 2013, 08:04 AM
Filed Under: Industry News

Strong capital market conditions continue to support a pickup in unsecured debt issuance by U.S. business development companies (BDCs), primarily middle-market lenders, and this has enhanced funding flexibility for these firms, according to Fitch.

In 2012 and 1Q13, unsecured issuance, including convertible securities and retail notes, amounted to $1.9 billion across six rated BDCs, compared with $545 million of unsecured issuance across three rated issuers in 2011. Fitch Ratings views an unsecured funding component favorably, as it provides funding diversity, as well as flexibility to encumber assets if necessary for liquidity purposes.

The BDC space just received further encouragement from Prospect Capital Corporation's issuance of $250 million of 10-year unsecured notes on March 15, with a coupon of 5.875%. This was the first institutional debt issuance in the BDC space since the financial crisis. Prior to 2008, American Capital and Allied Capital, which was acquired by Ares Capital in 2010, were both active issuers in the institutional space, but both tripped debt covenants in late 2008, forcing an extended period of negotiations with creditors and leading to a shutdown of new BDC institutional market debt issuance.

Fitch views broader access to the unsecured market as a positive development for BDCs, as they look to diversify sources of capital beyond bank funding, convertibles, retail bonds, and equity.

Many BDCs, which are required by law to maintain debt-to-equity ratios below 1.0x, also tapped the equity market successfully in 2012, as portfolio valuations and investor sentiment improved in a more vibrant capital markets environment. Public equity issuance for rated issuers rose more than 300% from 2011 to nearly $1.3 billion in calendar year 2012, and this has provided BDCs with ample capital to invest and facilitated the maintenance of leverage levels below internal targets.

However, owing to the recent frothier state of the credit markets, we think deal origination may slow somewhat, and the need for new BDC funding this year could be limited. Fitch expects some of the larger players in the space to issue unsecured debt opportunistically this year, especially if institutional market access remains good.

Fitch-rated BDCs include American Capital, Apollo Investment, Ares Capital, BlackRock Kelso Capital, Fifth Street, PennantPark, and Solar Capital.

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