BDCs seize the moment to raise new capital

Among the BDCs moving in September to raise capital have been American Capital Ltd, Fifth Street Finance Corp, Apollo Investment Corp and Golub Capital BDC Inc. BDCs, which can provide both equity and debt financing, typically lend to businesses with annual revenue of less than $500 million. They have become more prominent in the leveraged lending landscape since the financial crisis of 2008 and 2009, as commercial banks have pulled back from riskier cash-flow financing.

The additional capital means the companies will have greater capacity to finance sponsor-backed deals, but some market watchers voice concern that the need to put money to work will leave the lenders overextended in the next recession.

In the largest fundraise in recent weeks, American Capital of Bethesda, Maryland. American Capital priced a private offering of $350 million aggregate principal amount consisting of 6.5 percent senior notes. American Capital, which struggled during the financial crisis, said it planned to use the proceeds to make portfolio investments and for other purposes.

Fifth Street, based in White Plains, New York, raised $159.8 million through an add-on offering of 15 million shares of its stock. The lender, which floated a $100 million IPO in July for a second BDC, Fifth Street Senior Floating Rate Corp, to focus on senior debt, said it plans to use the proceeds of the latest offering to repay debt so it can re-borrow under its credit facilities to make new investments.

Apollo Investment Corp, the BDC affiliate of buyout mega-firm Apollo Global Management LP, raised $110 million by amending its existing credit facility. Apollo Investment said the $1.25 billion credit facility contains an accordion feature through which it can be expanded to $1.71 billion under certain conditions.

Golub Capital BDC, an affiliate of New York leveraged lender Golub Capital Inc, raised $50.8 million by selling 3 million shares at $16.95 per share. In addition to making portfolio investments, Golub Capital said it expects to use a portion of the proceeds to capitalize GC SBIC V LP, its fifth vehicle to be structured as a small business investment company.

But given the sluggishness of the M&A market this year, Nicholas Marshi, a co-founder and the chief investment officer of Southland Capital Management, a Santa Monica, California, hedge fund that focuses on the BDC sector, said he feared that the companies would overreach.

A key appeal of BDCs is their relatively high dividend yield, which often approaches 10 percent, making the category an extremely attractive source of returns when interest rates are low, as they have been in the United States since the financial crisis.

“A lot of this is striking while the iron is hot,” Marshi told Buyouts. “They’re raising capital then seeing if they can find a way to invest it.”

Marshi believes the additional capital puts pressure on the companies to enter into new transactions, often in riskier deals, as a way to maintain their returns to investors, which in turn could mean trouble if those investments go bad when the economy slumps in the future.