BDCs Raise Fresh Capital To Back Deals

  • Both credit and equity deals
  • New deals and amendments
  • Market has been uneven

Business development companies are taking advantage of favorable credit market conditions to raise additional capital for future deals. While most of the action involves the specialty lenders expanding their credit facilities, in at least one recent example the BDC is looking at a potential equity raise.

Among those that have tapped the markets in recent weeks are PennantPark Investment Corp., Apollo Investment Corp., Fifth Street Finance Corp. and Ares Capital Corp., a review of their recent announcements by Buyouts shows.

The New York BDC PennantPark was fairly typical of the recent activity. The company said it had amended and restated an existing senior secured revolving credit facility, increasing the size of its credit line by $65 million to total $380 million, which actually was the most modest increase among the deals we reviewed. PennantPark said the amendments also added an accordion feature to the loan, so that it can be expanded to $600 million under certain conditions, for a total increase of $285 million, which would make it the largest expansion of lending capacity in our review.

PennantPark invests primarily in private U.S. mid-market companies in the form of senior secured loans, mezzanine debt and equity investments. “We think it will be a good market for middle market M&A,” Arthur H. Penn, PennantPark’s founder, CEO and chairman, told Buyouts. “It’s been a good market for the last couple of years.”

But it has been a decidedly uneven market. And just as 2011 was notable for a mid-summer market break when capital flows paused as a result of Europe’s financial tumult, some BDCs have struggled as well.

Apollo Investment Corp., for instance, shook up its executive suite in February after an earnings miss, and it said it would consider raising $200 million in fresh equity. The company said that Apollo Global Management LP, the New York buyout mega-firm with which it is affiliated, had made a commitment to support the equity raise, which could take the form of either a marketed deal or a rights offering.

Apollo Investment also said its board had ousted Patrick Dalton, who held positions as president and chief operating officer and chief investment officer of its investment adviser Apollo Investment Management, and Richard Peteka, its CFO. Apollo Investment said Edward Goldthorpe, a 13-year veteran of Goldman Sachs where he served as a managing director with the bank loan distressed investing desk, would become president and CIO, and Mark Harris, an Asian expert from Avenue Capital Group, would become CFO and treasurer.

James Zelter, Apollo Investment’s CEO and now interim president until Goldthorpe comes aboard, said the increased capital would enable the company to pursue new opportunities in the market. “Prior to the credit crisis, AINV focused primarily on providing acquisition financing to middle market private equity sponsors,” Zelter said in a press release, referring to the company by its ticker symbol. “We intend to expand our footprint to provide a wider array of proprietary private financing solutions for companies across a broad spectrum of industries and situations.”

Fifth Street Finance Corp. returned to the market for the second time this year, announcing March 2 that it had amended the terms of its $230 million syndicated credit facility led by ING Capital LLC. Not only did the amendment give the White Plains, N.Y., two additional years, until 2016, on what had been a three year credit line, but an accordion feature in the agreement will allows for future expansion of the line by an additional $220 million, up to a total of $450 million, under certain conditions.

That followed a supplemental stock offering by Fifth Street in February, which raised $145.5 million at $12.65 per share. Fifth Street typically lends $20 million per deal to borrowers with an average EBITDA of $10 million. The company works exclusively on sponsor-backed transactions.

And Ares Capital Corp. closed a new eight-year, $200 million revolving funding facility in January with Sumitomo Mitsui Banking Corp., an affiliate of Sumitomo Mitsui Financial Group Inc., one of the world’s largest banks.

“SMBC’s strong financial commitment expands our borrowing capacity, further diversifies our funding sources and improves our overall funding costs,” said Michael Arougheti, president of Ares Capital, in a press release announcing the deal. We look forward to having a mutually rewarding, long term relationship with SMBC.”

Sumitomo Mitsui had established a similar $200 million facility with Fifth Street last September. A Sumitomo Mitsui spokeswoman declined to comment, beyond the BDCs’ announcements.