- Some business development companies, which lend to midsized businesses, may face a funding squeeze as they raise capital through selling shares at a discount to NAV or issue bonds at high interest rates just as defaults from their portfolio companies start to rise.
- Bain Capital Specialty Finance (BCSF -0.1%) and Golub Capital BDC (GBDC +0.1%) both raised capital by selling stock at significant discounts to their NAV, a move that usually seen as a sign of stress.
- BCSF also disclosed in its last earnings report that an amendment to one of its bank facilities made it an event of default if the company didn't begin the process to sell stock by the end of June 22, 2020.
- It also recently issued bonds at high interest rates, as did FS KKR Capital (FSK +1.3%).
- Generally, such firms rely on lines of credit from banks for funding, a form of borrowing that carries low interest rates.
- But during downturns, banks can reduce borrowing limits and demand additional collateral or cash if assets lose value.
- Meanwhile, the companies that the BDCs are lending to can also draw down credit lines from the BDCs to bolster their balance sheets, as they did in March.
- “These capital structures can only handle so much loan-value deterioration,” said Finian O’Shea, a BDC analyst at Wells Fargo. While lenders that raised cash may not have violated the terms in their credit facilities, they did those things "to relieve that potential pressure,” he said.
- The BDCs that have recently raised money said they're being prudent in the face of uncertainty caused by the pandemic.
- GBDC "is not facing nor has it ever faced any pressure from lenders to raise capital," said CEO David Golub.
- FS KKR Co-President and Chief Investment Officer Dan Pietrzak said the debt issuance further enhances "our strong liquidity with only a nominal increase to our overall cost in debt."
- Previously: A slow economic recovery would test BDCs (May 31)
- ETFs: BIZD, BDCS, FGB, BDCY