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With the passage of nearly two months, our prediction that substantial new equity raising by BDCs was about to occur has been proven correct. Allied Capital (ALD) and Gladstone Capital (GLAD) led the way in January. Now several more BDCs have announced equity raisings. Most notably, American Capital Strategies (ACAS) and Prospect Capital (PSEC) have announced substantial stock issuance at prices above NAV, which seemed impossible only weeks ago.
Mar 28 03:02 am
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All Comments by Nicholas Marshi »Business Development Companies Raising Capital in a Recession [View article]
More interesting is that several other BDCs have announced rights offerings to raise capital from existing investors. As the companies stock price trade below NAV, this is the only allowable way to raise equity in this environment. To date, Ares Capital (ARCC), MCG capital (MCGC) and Gladstone Investment (GAIN) have announced "transferable rights offerings" to shareholders.
One could see these moves, especially for MCG Capital, as more defensive than offensive-building up a balance sheet being eroded by questionable investments. Gladstone likewise did mention that the new capital would help with diversification by expanding total assets. Overall, though, most of these capital raisings reflect managements belief that lending and investment opportunities in the months ahead will be unprecedented and the more "dry powder" available the better the returns to shareholders. Barring a melt down in the economy-also of unprecedented proportions-we agree that this is a good time to generate liquidity. With most of the money center banks preoccupied, CLOs in deep freeze and hedge funds in panic mode the supply of capital will drop and those remaining providers will be able to command better terms. Even buying existing loans in the secondary marketplace may result in oversized returns thanks to the rush for the doors underway, even in the middle market.
The bad news is that even with new equity being raised in the BDC industry (about one third of the universe of BDC companies has raised new money or announced their intention to do so in 2008 to date), the bottom has not yet been found as we so optimistically predicted back in January.