Another spate of business development companies are raising capital and strengthening their finances, taking advantage of yield-hungry markets and opening new borrowing opportunities for mid-market sponsors.
Kohlberg Capital Corp. announced in March that it had raised $55 million through an offering of unsecured 8.75% convertible senior notes due in 2016. The New York company invests through senior debt, second lien debt, secured and unsecured subordinated debt, mezzanine debt and equity.
Around the same time, Solar Senior Capital Partners raised $160 million in an IPO. The company, a sister BDC to the existing Solar Capital Partners, will be the first company of its kind to operate as a pure play focused on senior loans to the mid-market, according to Thomson Reuters LPC, a sister service of Buyouts that tracks the loan market.
Business development companies are investment vehicles designed to issue shares in the public equity markets in order to raise capital to invest in private U.S. middle market companies. Taken with earlier announcements by Monroe Capital LLC and Fifth Street Finance Corp., the continued fundraising portends good availability of capital for sponsor-backed deals in 2011.
As Freeman & Co. LLC, an investment bank that focuses on the financial services industry, put it in a recent commentary, “Balance sheet pressure has eased on BDCs, who again have access to the capital markets and are playing an active role in the small and middle market lending space.”
The lenders are pursuing a variety of strategies for their fundraising. For example, Kohlberg Capital, although it is a public company with general stockholders, tapped the credit market itself in raising $55 million in unsecured convertible notes through a private placement with qualified institutional buyers. The BDC said it plans to use the proceeds primarily for investing in portfolio companies.
Solar Senior Capital will invest most of its IPO proceeds in private junk bonds issued mostly by middle-market companies, making the IPO a financial vehicle for investors seeking exposure to those securities, as sister news service Reuters noted. The fund will be run by Michael Gross, founder of another BDC, Apollo Investment Corp., an affiliate of the New York buyout firm
Monroe Capital, which registered to raise $150 million from public investors by forming a BDC, Monroe Capital Corp., also received a license in February from the Small Business Administration to raise funds for small business investment company, or SBIC, opening the door for additional lending capacity of up to $225 million
Fifth Street had the most straightforward fundraising plan, simply raising $145.5 million in a supplemental stock offering that recharged a lending capacity that it had almost fully consumed.
“BDCs have the wind at their back in 2011,” Greg Watson, equity research analyst at Stifel Nicolaus, told Thomson Reuters LPC. But Watson also cautioned that strong demand by investors in credit vehicles such as BDCs could lead to imbalances in the leveraged loan market, potentially reducing yields on mid-market loans and thus perhaps damaging the availability of such credit.