BDCs try again for two-to-one leverage

BDCs would benefit in several ways from the lifting of the debt-to-equity ratio cap, including the chance to earn better returns through higher leverage. According to Brett Palmer, president of the SBIA, a trade group for buyout and mezzanine firms that invest in lower-middle-market companies, BDCs would also have more “head room” in the event of a market shock that collapses equity values. A two-to-one ratio means they’d be far less likely to have to liquidate assets to stay in compliance with the cap. The legislation would also let BDCs, a big force in the unitranche loan market, invest in less risky, higher-rated loans while still maintaining a healthy dividend for investors, he said.

The proposed legislation includes other elements favorable to BDCs, including one that would allow them to conduct shelf registrations for follow-on securities offerings, a process that involves far less paperwork than conventional offerings. Another would let BDCs issue more than one kind of preferred stock. 

Similar legislation, tagged the Small Business Credit Availability Act, emerged during the last Congressional session, but it died when the 113th Congress adjourned without passing it. Palmer said the bill suffered one of its biggest setbacks when SEC Chairwoman Mary Jo White raised concerns about whether lifting the debt-to-equity ratio would be fair to shareholders that invested in BDCs on the basis of a more conservative capital structure. That was enough to sour Democratic lawmakers, who tend to be sensitive to any loosening of investor protections, Palmer said.

During the BDC fly-in, industry professionals, along with members of Congress and the SEC, will talk about ways to revise the legislation in a way that could be palatable to all parties. “The goal is to get a bill that can pass both chambers of congress and be signed by the president,” Palmer said.

The SBIA, which counts some 30 BDCs among its membership, expects 75 to 80 professionals from 40 to 50 BDCs to attend the fly-in, including representatives from Ares Capital Corp, Franklin Square Capital Partners, Main Street Capital Corp, Medley Capital Corp and Monroe Capital.

All told some 50 publicly traded BDCs had combined investment portfolios valued at north of $60 billion as of year-end, according to Keefe, Bruyette & Woods.

During a morning of briefings and educational sessions held at the offices of law firm Sutherland Asbill & Brennan, BDC professionals plan to meet with one another, with regulators, with U.S. Representative Mick Mulvaney, a Republican from South Carolina and member of the financial services committee, and with U.S. Senator Mike Rounds, a Republican from South Dakota and member of the banking committee. In the afternoon the BDC professionals will head over to Capitol Hill for some 30 to 40 meetings with other lawmakers.

Getting the bill passed by the 114th Congress is far from a sure thing. One of the obstacles in the last session was the Congressional Budget Office’s estimate that the proposed BDC legislation would cost taxpayers $81 million over 10 years. The rationale was that BDCs, which aren’t taxed at the corporate level, would take market share from banks and other lenders that are taxed at the corporate level. “It was the strangest interpretation I’ve seen for a long time coming out of the CBO,” Palmer said. “It’s one of those Washington loopy things that people in the real world scratch their heads [about], yet we have to deal with.”