Mid-sized Business Development Company (BDC) Fifth Streeet Finance (NASDAQ:FSC) has announced that the SBIC had fixed $65mn of its borrowings for a 10-year period at a rate of 4.084%. For the full press release, click here.
The FSC announcement underscores once again what a home run the SBIC financing has been for the Business Development Company industry in the last two years. Today half the 25 industry players we track have either received one or two SBIC licenses, and have been able to tap up to $225mn in borrowings from the government, or are applying for a license. Moreover, the loan terms are for 10 years, and no longer have a pre-payment penalty.
Best of all, as the FSC news underscores, pricing is remarkably low. Fifth Street is paying just over 4.0% per annum (which is not even the lowest “fixing” any FSC has received). That pricing compares very favorably to the term debt borrowings the larger BDCs have arranged in the private market, which range between 6.5-7.5%. Remember that most BDCs are able to turn their SBIC borrowings into lower middle market loans at all-in returns of 14.0% or more. That’s a 10% net margin, which is very high even in the world of leveraged buy-outs. (Yes, there are upfront fees and much initial paperwork, followed by SBIC audits and oversight, but for 4.0% 10-year money, it’s worth the expense and the agony, if the number of BDCs standing Oliver Twist-like at the SBIC’s gates is anything to go by.)
We are not close enough to know if the spigot will remain open or not. We do know that the availability of this debt capital (where the SBIC doles out $2 of loans for every $1 of capital invested) has become a critical feature for most lower middle market BDCs. Certainly there are a number of BDCs that have just begun the process of tapping this critical capital resource, like Horizon Financial (NASDAQ:HRZN). Other BDCs, including Fifth Street, Triangle Capital (NYSE:TCAP) and Main Street Capital (NYSE:MAIN), are reaching the SBIC borrowing limits and must find more conventional sources of financing. However, two-year Revolvers from commercial banks do not provide anywhere near the asset-liability matching and low fixed-rate financing attributes that the SBIC program provides. Many BDCs are still looking hopefully towards Washington for a possible increase in the SBIC program to $350mn.
Disclosure: I am long FSC, MAIN, TCAP, HRZN.