Bloomberg Businessweek - USA (2020-04-20)

 FINANCE Bloomberg Businessweek April 20, 2020

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○ Investors in business development compa

Renowned as risk-takers, firms known as business

development companies raised money byselling

stock, multiplied the haul with leverage,then

used it to lend to some of the country’smost

indebted companies. If all went well, they’dprofit

handsomely.

But right now the strategy is going badlyfor

BDCs, which became key participants in an$812bil-

lion private credit market that flourishedoutside

of traditional banking. The Federal Reserveand

the U.S. government have announced programsto

prop up struggling companies, but BDCborrow-

ers may not benefit much. Many of the businesses

they finance, owned in part by private equityfirms,

don’t qualify under current rules. Analystsandrat-

ings companies are sounding alarms as theBDCs

rush to grab cash to shore up their finances or

throw lifelines to borrowers. Golub Capital BDC

Inc.—one of the largest of these shadow banks—is

among those raising funds in a way that could sig-

nificantly dilute the equity of existing shareholders.

BDCs typically trade as stocks, but they’re

similar to funds in that they’re essentially port-

folios of investments—in this case, loans to com-

panies that generate yields for investors. BDCs

themselves also borrow, creating leverage that can

juicereturns.Butthistacticalsoampsuptherisk,

andthey’vefoundthemselveswrong-footedwith

thepandemicupendingcommerceandstraining

theglobalfinancialsystem.“TheBDCsectoris

amongthosemostaffectedbythiscreditshock,”

analystsatMoody’sInvestorsServicewroteina

reportonApril7, downgradingtheiroutlookfor

thesectortonegativefromstable.“BDCs’loan

portfolioswilldeclineinvalue,weakeningBDCs’

capitalpositionsandincreasingtheirriskofbank

covenantnoncompliance,”potentiallyleadingto

defaultsonthedebtBDCsborrowthemselves.

Ina harbingerofwhat’stocome,theBDC

PortmanRidgeFinanceCorp.recentlywatched

a companythatit’shelpedfinancesince 2015

collapseina matterofweeks.Theborrower,

Chapter11 prote

to90%dropin

s byprivateequityfi

JF WCapitalPartners,

oper forthreeAlaskaaircarr

saidit t stateandfederalaidandt

towork endersbutranoutofcashby

endofMa , forcingit tosuspendoperation

layoffemployees.Ravnsaidit hopestowor

a solutionandrestartoperations.Theinvest

makesupa smallamountofPortmanRidg rt-

folio;a spokeswomandeclinedtocomment.

BDCsarebiglenderstothebusiness-services

andtechnologysectors,whichmaybemoreresil-

ientinthedowntur Somelendersaremore

exposedtoindustriessuchasentertainment,lei-

sure, retail, and travel,which have been walloped

in the pandemic. One problem for BDCs is that

they often provide financing to highly indebted

corporations owned by private equity firms. Many

businesses that private equity groups control are

excluded from billions of dollars in potentially

forgivable Small Business Administration loans.

A Federal Reserve lending program announced

on April 9 also deems borrowers with high lever-

age levels ineligible.

Anotherproblemis thatBDCssometimesoffer

companiescreditlines.Thosearenowgetting

drawndownenmasse,siphoningawaymuch-

neededcash.Attheendoflastyear,untapped

creditfacilitiesamountedtoroughly8%ofthe

portfoliosata groupofBDCstrackedbyFitch

Ratings,whichhashada negativeoutlookon

thesectorforyears.Muchofthatmoneyis likely

beinglentoutnow.

AtleasttwoBDCsarelookingtoshoreuptheir

liquiditywitha rightsoffering,whichgivesshare-

holdersanoptiontopurchasemorestock.Golub

CapitalBDC,with$4.6billioninassets,announced

inearlyAprilthatit wantedtoraiseasmuchas

$375.3millionina rightsofferingthatstartedon

April9.InSecuritiesandExchangeCommission

○ Estimated value of

business development

companies’portfolios

atyearend

2009

$19b

2014

$75b

2019*

$113b

PHOTO: SHUTTERSTOCK. *AS OF THIRD QUARTER. DATA: COMPILED BY BLOOMBERG

, forcing it to suspend oper

Out