Bloomberg Businessweek - USA (2020-04-20)

(Antfer) #1
 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


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