US High Yield Bond Funds, ETFs see $586M Investor Cash Inflow

U.S. high-yield funds recorded an inflow of $586 million for the week ended June 7, according to weekly reporters to Lipper only. This is the second straight week of inflows into the asset class for a total of $1.1 billion over that period.

US high yield fund flows

Mutual funds made up the bulk of the inflow this week, at $355 million, while $231 million flowed into ETFs. That compares to last week’s exit of $617 million from mutual funds against a $1.1 billion inflow into ETFs.

The year-to-date total outflow is now $4.9 billion, reflecting a $4.8 billion exodus from mutual funds and an $85 million exit from ETFs.

The four-week trailing average is now in positive territory, after being in the red for five straight weeks, climbing to positive $297 million from negative $280.5 million last week.

The change due to market conditions this past week was a rise of $154 million, making four consecutive weeks in the black. Total assets at the end of the observation period were $207 billion. ETFs account for about 23% of the total, at $47.6 billion. — James Passeri

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William Blair Hires High-Yield Finance Team from Imperial Capital

William Blair has hired a high-yield finance team from Imperial Capital in the firm’s bid to become the leading leveraged finance platform focused on middle market companies.

Jeff Zolkin joined William Blair as managing director, head of high-yield finance. He will be based in Los Angeles. At Imperial Capital, Zolkin was head of leveraged finance. Prior to six years at Imperial Capital, Zolkin also worked at Global Hunter Securities, where he was co-head of financial advisory services. He also worked at Jefferies.

Jonathan Lee joined William Blair as director, high-yield finance. He will be based in Los Angeles. Lee had been at Imperial Capital since early 2011. Prior to Imperial, he also worked at Trinity Capital and Jefferies, both based in Los Angeles.

Paul Majeski joined as vice president, high-yield finance. He will be based in New York. He had been at Imperial Capital since 2010 in investment banking. Prior to Imperial Capital, he worked at FTI Consulting.

Kelly Martin is head of leveraged finance at William Blair.

Since 2011, Zolkin’s team has built a high-yield finance business targeting the middle market, with over $5 billion of lead-managed financings over 30 transactions.

William Blair, based in Chicago, is a global investment banking and asset management firm. — Abby Latour

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This story first appeared on, an offering of S&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.


How did ACAS become a takeover target? Answer’s in the portfolio mix

How did American Capital become a takeover target? The answer lies in the lender’s equity-heavy, low-yielding investment portfolio mix.

Ares Capital, which trades on the Nasdaq under the ticker ARCC, announced on May 23 it would buy American Capital in a $3.4 billion deal, excluding the company’s mortgage management businesses. American Capital trades on the Nasdaq as ACAS.

One of American Capital’s strategies was its trademarked One Stop Buyout, where it could invest in debt ranging from senior to junior, as well as preferred and common stock, acquiring control of an operating company through a transaction.

However, the accumulation of equity did not allow the company to maintain the steady dividend growth that investors had grown to rely on.

In November 2008, the company stopped paying dividends and began evaluating them quarterly to better manage volatile markets. At the same time, American Capital announced an expansion into European middle market investing through the acquisition of European Capital. Also that year, American Capital opened an office in Hong Kong, its first office in Asia.

The news of the dividend policy change triggered a plunge in American Capital shares. Shares have persistently traded below book value since.

At its peak, the One Stop Buyout strategy accounted for 65% of American Capital’s portfolio. It has since slashed this to under 20% of the portfolio, of which less than half of that amount is equity. It continues to sell off assets.

In a reflection of the change in investment mix, S&P Global Ratings placed Ares Capital BBB issuer, senior unsecured, and senior secured credit ratings on CreditWatch negative, as a result of the cash and stock acquisition plan.

“The CreditWatch placement reflects our expectation that the acquisition may weaken the combined company’s pro forma risk profile, with a higher level of equity and structured finance investments,” said S&P Global analyst Trevor Martin in a May 23 research note.

At the same time, S&P Global Ratings placed the BB rating on American Capital on CreditWatch positive after the news.

“The CreditWatch reflects our expectation that ACAS will be merged into higher-rated ARCC upon the completion of the transaction, which we expect to close in the second half of 2016. Also, we expect ACAS’ outstanding debt to be repaid in conjunction with the transaction,” S&P Global analyst Matthew Carroll said in a research note.

Not the first time
But Ares Capital says it has a plan. In 2010, Ares acquired Allied Capital, a BDC which pre-dated the financial crisis. On a conference call at the time of the deal announcement, management said it plans a similar strategy for integrating American Capital, of repositioning lower yielding and non-yielding investments into higher-yielding, directly sourced assets.

Ares Capital managed to increase the weighted average yield of the Allied investment portfolio by over 130 bps in the 18 months after the purchase, and reduce non-accrual investments from over 9% to 2.3% by the end of 2012, Michael Arougheti said in the May 23 investor call. Arougheti is co-chairman of Ares Capital and co-founder of Ares.

“The Allied book was a little bit more challenged, or a lot more challenged, than the ACAS portfolio is today,” Arougheti said. Ares Capital’s non-accrual investments totaled 1.3% on a cost basis, or 0.6% at fair value, as of March 31.

“Remember, that acquisition was made against a much different market backdrop. And so, while the roadmap is going to be very similar… this can be a lot less complicated that that transaction was for us.”

The failings of American Capital’s strategy reached fever pitch last November, when the lender capitulated to pressure from activist investor Elliott Management just a week after it raised an issue with the spin-off plan.

American Capital’s management had proposed in late 2014 spinning off two new BDCs to shareholders, and said it would focus on the business of asset management. However, in May last year, management revised the plan, saying it would spin off just one BDC.

But Elliott Management stepped in, announcing in November that it acquired an 8.4% stake. It later increased its stake further, becoming the largest shareholder of American Capital. The company argued that even the new plan would only serve to entrench poorly performing management, and called for management to withdraw the spin-off proposal.

American Capital listened. Within days, American Capital unveiled a strategic review, including a sale of part or all of the company.

One reason for the about-face was likely its incorporation status in Delaware, which made the board vulnerable to annual election. Incorporation in Maryland, utilized by other BDCs, is considered more favorable to management, in part because the election of boards is often staggered.

Although American Capital had shrunk its investment portfolio in recent quarters, it had participated in the market until recently.

Among recent deals, American Capital helped arrange in November a $170 million loan backing an acquisition of Kele, Inc. by Snow Phipps Group. Antares Capital was agent. In June 2015, American Capital was sole lender and second-lien agent on a $51 million second-lien loan backing an acquisition of Compusearch Software Systems by ABRY Partners. — Abby Latour

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Qlik Technologies record $1B loan signals direct lending growing up

With today’s record $1 billion loan to fund an acquisition of Qlik Technologies, BDCs are giving notice that direct lending is moving far beyond its middle market roots to challenge traditionally distributed debt financing.

Ares Capital Corp. is leading the $1.075 financing, announced today, which is the largest-ever unitranche credit facility by a BDC. Unitranche combines different tiers of debt, which normally would have different interest rates, into a single loan.

Private equity firm Thoma Bravo is buying Qlik, based in Radnor, Pa., but founded in Sweden, which provides data visualization and analytics software. Shares trade on Nasdaq under the ticker QLIK.

Golub Capital, TPG’s dedicated credit and special situations platform, or TSSP, and Varagon Capital Partners are also joint lead arrangers.

It remains to be seen if this is the advent of a new lending landscape in which unitranche deals of $1 billion or more are commonplace. The acquisition financing for Qlik Technologies stemmed from a period in the loan market when primary issuance was stalled due to financial market volatility that disrupted usual syndication channels.

Leveraged finance market conditions have since improved. Admittedly, the deal’s structure would be a tougher decision by Thoma Bravo in current conditions than those of two months ago, when risk-averse investors shunned complex-story credits or pushed for economic and structural concessions to levels that made buyouts unattractive.

What’s more, this transaction isn’t expected to close until the third quarter, when financial market conditions could be far different than those offered in what is, for now, a buoyant environment for credit. Minimizing risk due to the syndication process is far more attractive to a buyer in most cases.

The transaction is subject to shareholder and regulatory approvals.

A merger deal announced last week stoked expectations that larger loan deals may be ahead from BDCs. Ares Capital, which trades on Nasdaq under the ticker ARCC, announced on May 23 it would buy rival lender American Capital, which trades on Nasdaq as ACAS, for $3.4 billion.

Ares management made no secret of the fact that the company’s purchase of American Capital would allow Ares to originate larger loans, thus generating more underwriting and distribution fees.

In an investor presentation about the purchase of American Capital, Ares pointed out how volatile market conditions had led to enhanced pricing and terms, and increased regulatory burden for banks was opening opportunities for them.

Market volatility—as well as increased regulatory scrutiny of commercial banks that emerged more than two years ago—had already opened the door to club-like transactions by BDCs, which will likely hold the majority of the debt for the Qlik deal.

BDCs are able, and willing, to accept higher leverage levels than banks. In the case of Qlik Technologies, the transaction is expected to result in leverage of more than 6x, sources said.

What’s more, the company generates most revenue outside the U.S., and EBITDA is highly adjusted, creating a structurally complex deal, sources said. Significant cost savings are expected through the buyout.

Such adjustments can present hurdles for banks looking to gain internal approvals to underwrite debt deals, and the prospect of a new alternative financing channel could spur renewed interest in buyout business.

Notably, the $1.075 billion unitranche loan for Qlik Technologies accounts for around one-third of the roughly $3 billion purchase price. Under terms of the acquisition, Qlik shareholders will receive $30.50 in cash per share.

Ares Capital says it is committed to holding a large portion of the financing. At the same time, Ares Capital said it would lead a syndication process to attract more lenders to the credit facility, but only a small part is expected to be syndicated.

“We believe this transaction is representative of the growing acceptance of direct lending as a mature asset class, and we believe our market leading position puts us in the forefront of this paradigm shift,” said Kipp deVeer, Ares Capital CEO, in a statement today.

Ares Capital is no stranger to larger-sized deals.

Last year, Ares Capital closed an $800 million loan for American Seafoods Group, another example of a non-regulated arranger capturing lending business that usually would have gone to a large bank. American Seafoods used proceeds to refinance debt and fund a bond exchange.

The amount of Ares Capital’s exposure to this investment has since shrunk.

As of March 31, the fair value of the American Seafood investment in Ares Capital’s investment portfolio totaled $81.7 million, including first-lien debt, second-lien debt, equity, and warrants. The largest of these was a $55 million, L+900 second-lien loan due 2022, with a fair value of $53 million.

The per-share purchase price for Qlik represents a 40% premium over $21.83, which was the average share price in the 10 days prior to March 3.

On March 3, activist shareholder Elliott Management unveiled an investment in Qlik Technologies, a move that prompted the company to put itself up for sale. Later that month, Qlik hired Morgan Stanley to explore a possible sale of the company, Reuters reported. — Abby Latour

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Senate hearing opens discussion on BDC regulation changes

A hearing by the Senate banking committee showed bi-partisan agreement for BDCs as a driver of growth for smaller U.S. companies, but exposed some rifts over whether financial companies should benefit from easier regulation.

BDCs are seeking to reform laws, including allowing more leverage of a 2:1 debt-to-equity ratio, up from the current 1:1 limit. They say the increase would be modest compared to existing levels for other lenders, which can reach 15:1 for banks, and the low-20x ratio for hedge funds.

A handful of BDCs are seeking to raise investment limits in financial companies. They argue that the current regulatory framework, dating from the 1980s when Congress created BDCs, fails to reflect the transformation of the U.S. economy, away from manufacturing.

BDCs stress that they are not seeking any government or taxpayer support.

They are also seeking to ease SEC filing requirements, a change that would streamline offering and registration rules, but not diminish investor protections.

Ares Management President Michael Arougheti told the committee members in a hearing on May 19 that although BDCs vary by scope, they largely agree that regulation is outdated and holding back the industry from more lending from a sector of the U.S. economy responsible for much job creation.

“While the BDC industry has been thriving, we are not capitalized well enough to meet the needs of middle market borrowers that we serve. We could grow more to meet these needs,” Arougheti said.

In response to criticism about expansion of investment to financial services companies, the issue of the 30% limit requires further discussion, Arougheti said.

The legislation under discussion is the result of lengthy bi-partisan collaboration and reflects concern about increased financial services investments, resulting in a prohibition on certain investments, including private equity funds, hedge funds and CLOs, Arougheti added.

“There are many financial services companies that have mandates that are consistent with the policy mandates of a BDC,” Arougheti added.

Senator Elizabeth Warren (D-MA) raised the issue of high management fees of BDCs even in the face of poor shareholder returns. Several BDCs have indeed moved to cut fees in order to better align interests of shareholders and BDC management companies.

She said that Ares’ management and incentive fees have soared, at over 35% annually over the past decade, outpacing shareholder returns of 5%, driving institutional investors away from the sector, and leaving behind vulnerable mom-and-pop retail investors. Arougheti countered by saying reinvestment of dividends needed to be taken into account when calculating returns, and said institutional investors account for 50–60% of shareholders.

Warren said raising the limit of financial services investment to 50%, from 30%, diverts money away from small businesses that need it, while BDCs still reap the tax break used to incentivize small business investment.

“A lot of BDCs focus on small business investments and fill a hole in the market. A lot of companies in Massachusetts and across the country get investment money from BDCs,” said Warren.

“If you really want to have more money to invest, why don’t you lower your high fees and offer better returns to your investors? Then you get more money, and you can go invest it in small businesses,” Warren said.

Brett Palmer, President of the Small Business Investor Alliance (SBIA), said the May 19 hearing, the first major legislative action on BDCs in the Senate, was a step toward a bill that could lead to a new law.

“There is broad agreement that BDCs are filling a critical gap in helping middle market and lower middle market companies grow. There is a road map for getting a BDC bill across the finish line, if not this year, then next,” Palmer said, stressing the goal was this year.

Technically, the hearing record is still open. The Senate banking subcommittee for securities and investment could return with further questions to any of the witnesses. Then, senators can decide what the next stop will be, ranging from no action to introduction of a bill.

Pat Toomey (R-PA) brought up the example of Pittsburgh Glass Works, a company that has benefited from a BDC against a backdrop that has seen banks pulling back from lending to smaller companies following the financial crisis, resulting in a declining number of small businesses from 2009 to 2014.

The windshield manufacturer, a portfolio company of Kohlberg & Co., received $410 million in financing, of which $181 million came from Franklin Square BDCs.

“Business development companies have stepped in to fill that void,” Toomey told the committee hearing. “For Pittsburgh Glass, it was the best financing option available to them.”

FS Investment Corp.’s investment portfolio showed a $68 million L+912 (1% floor) first-lien loan due 2021 as of March 31, an SEC filing showed.

Arougheti cited the example of OTG Management, a borrower of Ares Capital. OTG Management won a contract to build out and operate food and beverage concessions at JetBlue’s terminal at New York airport JFK, but was unable to borrow from traditional senior debt lenders or private equity firms due to its limited operating history.

Ares Capital’s investment in OTG Management included a $24.7 million L+725 first-lien loan due 2017 as of March 31, an SEC filing showed. — Abby Latour

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Leveraged Finance Fights Melanoma benefit planned for May 24

The fifth annual Leveraged Finance Fights Melanoma benefit and cocktail party is planned for May 24 at the Summer Garden and Sea Grill at Rockefeller Center. Funds raised at the event will support the Melanoma Research Alliance (MRA), the world’s largest private funder of melanoma research, which was founded in 2007 by Debra and Leon Black under the auspices of the Milken Institute.

Since this event was launched in 2012, the leveraged finance community has come together and generously supported over $5 million of cutting-edge cancer research. These funded studies have accelerated advances in immunotherapy treatments that have led to breakthroughs like anti-PD-1 agents which are being used to treat melanoma, were recently approved to treat lung cancer, and are now being tested in other tumors including bladder, blood, and kidney cancers.

The event co-hosts are Brendan Dillon from UBS; Lee Grinberg from Elliott Management; George Mueller from KKR; Jeff Rowbottom from PSP Investments; Cade Thompson from KKR; and Trevor Watt from Hellman & Friedman. Attendees include the biggest names in leveraged finance, from all of the top banks, many investment houses, several law firms, select issuers, and some private equity sponsors. As with the prior events, LCD is a proud sponsor.

Due to ongoing operational support from its founders, 100% of donations to MRA go directly to support research programs working toward a cure for melanoma, the deadliest type of skin cancer. Since MRA began its work, 11 new treatments have been approved by the FDA.

Funds raised from prior year events have supported six MRA research awards at institutions spanning the U.S. These projects focus on targeted and immunotherapy treatments, which boost the immune system to fight off cancer more effectively. The studies address critical research questions to advance the development of new therapies for melanoma patients and inform progress against cancer as a whole.

“We’re making tremendous breakthroughs in understanding and treating melanoma, including several new therapies that could be game-changers for the entire field of oncology,” said Jeff Rowbottom, LFFM co-host and MRA board member. “The Leveraged Finance Fights Melanoma events have supported important research that is enabling innovations in the way we treat cancer.”

The objectives for the 2016 LFFM event are to increase awareness, to raise funds to further advance research, and to save lives. Melanoma awareness and early detection are vital when it comes to combating the disease; if melanoma is detected early—before it has spread beyond the skin—it is almost always treatable. Past events have led to many members of the leveraged finance community seeing dermatologists for skin checks and even to the discovery and treatment of several early stage melanomas.

Tickets are $300. For further information about the event and to purchase tickets, please Those seeking information about the event and sponsorship opportunities can contact Rachel Gazzerro of MRA at (202) 336-8947 or [email protected]. — Staff reports


TPG sees near-record originations in 4Q, helped by Idera investment

TPG Specialty Lending, a BDC trading on the NYSE under the ticker TSLX, said originations totaled a near-record $399 million in the recent quarter.

These originations compare to a gross total of $305 million in the final quarter of 2014 and $185 million in the quarter ended Sept. 30. The most recent quarter was the second strongest quarter for originations since TPG’s inception.

Among the new additions to the portfolio in the final quarter of 2015 was a significant piece of M&A financing for Idera, a loan deal that priced wide to talk in volatile market conditions. The loan funded an acquisition of Embarcadero Technologies, which was a portfolio company of TPG.

In October, TPG added a $62.5 million piece of Idera’s loan due 2021 at a cost basis of $56.4 million and $55.9 million at fair value. The loan accounts for 6.8% of TPG’s net assets.

Asked about the loan in an earnings call today, co-CEO Josh Easterly said TPG was able to co-invest in Idera across platforms and was motivated by an intimate knowledge of the software industry and the acquisition target.

“We were able to go in with size, with a big order, to drive terms on a credit we knew that benefited TSLX shareholders,” Easterly said.

Another addition to the investment portfolio was a $45 million first-lien loan due 2021 to MatrixCare, the company’s 10-K filed yesterday after market close showed. Interest on the loan is 6.25%. Fair value and the cost of the loan was $44.1 million as of Dec. 31, the 10-K showed.

GI Partners acquired Canadian healthcare IT company Logibec from OMERS Private Equity in December. OMERS retained Logibec’s former U.S. subsidiary, MatrixCare, which provides health records to long-term care and senior-living facilities.

Also during the quarter, TPG received repayment of a loan to bankrupt grocery store chain operator Great Atlantic & Pacific Tea Co. (A&P).

Exits and repayments totaled $155 million in the most recent quarter, for a net portfolio increase of $129 million in principal. The fair value of the investment portfolio was $1.49 billion as of Dec. 31, reflecting positions in 46 companies. Some 88% of the portfolio was in the first-lien debt of U.S. middle market companies.

Oil and gas

The BDC’s exposure to the troubled oil and gas sector was 3.2%, at fair value, in two investments: Mississippi Resources and Key Energy Services. This compared to oil and gas exposure of 4% for the portfolio as of Sept. 30, which included a loan to Milagro Oil & Gas. A bankruptcy judge confirmed a reorganization plan for Milagro on Oct. 8.

The investment in upstream E&P company Mississippi Resources included a $46.7 million 13% (including 1.5% PIK) first-lien loan due 2018 and equity. The Key Energy investment is a $13.5 million first-lien loan due 2020, booked with a fair value of $10.5 million in TPG’s portfolio, the SEC filing showed.

“We will opportunistically review situations,” Easterly said of potential lending to the oil and gas sector.


TPG Specialty Lending had no investments on non-accrual status at the end of the quarter.

TICC Capital

The portfolio reflected TPG’s ongoing interest in TICC Capital. TPG owns 1.6 million TICC shares, representing 1.2% of its investment portfolio. TPG is trying to acquire TICC Capital, saying TICC’s external manager has failed the BDC and, given the chance, TPG could improve returns for shareholders.

Earlier this month, TPG nominated a board member and proposed severing what it called TICC Capital’s failed management agreement with TICC Management. TPG owns roughly 3% of TICC Capital stock. An earlier stock-for-stock offer by TPG for TICC was rejected.

The move by TPG came after a shareholder vote at TICC in December that blocked a plan to change TICC Capital’s investment advisor to Benefit Street Partners.

“We believe the result of the shareholder vote not only reflects the demand for TICC shareholders for better management and governance, but also heralds an inflection point for the broader BDC industry to build a culture of accountability and shareholder alignment,” Easterly said today.


Net asset value per share declined to $15.15 at year-end, from $15.62 as of Sept. 30, and from $15.53 a year earlier. The decline was due to unrealized losses, widening credit spreads in the broader market, and volatility in the energy sector.

Shares of TPG were trading at $16.01 at midday today, up more than 1%, but the stock drifted down to $15.89 in afternoon trade. — Abby Latour

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Standard & Poor’s lowers Apollo Investment, cites oil & gas exposure

Standard & Poor’s cut the rating on Apollo Investment Corp. today to BBB–, from BBB, citing in part losses due to exposure to the oil and gas sector and a growing share of non-accrual loans. The ratings change is on both the issuer and the issuer’s unsecured debt.

Apollo Investment has a track record of losses, Standard & Poor’s said in a research note today, noting that realized losses totaled $131 million and unrealized losses came in at $103 million in 2015. Realized losses are expected to grow as unrealized losses become realized losses due to exits from the investments by the company, S&P said.

Apollo Investment’s asset quality is also deteriorating, the rating agency said. Non-accrual loans in the company’s investment portfolio increased last year, to 6.5% on a cost basis at year-end, from 1.4% as of March 31, 2015.

Although the company has moved away from mezzanine lending in recent years, second-lien secured and unsecured debt still accounted for 39% of the total portfolio as of Dec. 31, albeit down from 41% a year earlier. Moreover, non-yielding preferred and common equity investments accounted for 13% of the company’s investment portfolio, a higher share than seen in rivals’ portfolios, S&P said.

The company’s risk position has been hurt by industry concentration, including single-name exposure through a debt and equity investment in Merx Aviation Finance, which accounts for Apollo’s total exposure to the aviation sector.

The company has four specialty areas: 15.2% of Apollo’s total portfolio is in aviation, 12.9% is in oil and gas, 7.7% is in renewables, and 4% is in shipping. Apollo Investment’s top five positions represented 53% of adjusted total equity as of year-end, S&P said.

“We expect both the interest and interest and dividend ratios to be under pressure in the next 12 months as more investments may be classified as non-accrual, putting a burden on recurring income (non-deal-dependent income),” said Standard & Poor’s analyst Sebnem Caglayan.

The company’s leverage, which is measured by debt to adjusted total equity, was 0.90x at year-end.

“The outlook on [Apollo] is negative, reflecting that we could lower the rating if the company’s leverage exceeds 1.0x, while the company continues to operate with earnings ratios weaker than thresholds identified in our criteria,” Caglayan said.

“The negative outlook also incorporates our expectation of continuing losses and higher-than-peers’ nonaccrual loans resulting from the company’s elevated exposure to the oil and gas sector in the next 18–24 months,” Caglayan added. — Abby Latour

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BDCs advance cause to boost leverage with house committee vote

BDCs notched up another victory in a quest to boost leverage and reduce paperwork requirements.

In a 53-to-4 vote last month, the House Financial Services Committee passed HR 3868, the Small Business Credit Availability Act.

What’s notable in the committee vote is the strong showing of bipartisan support. A previous version of the bill was passed by the House Financial Services Committee 31-26, along a straight party line vote.

“The industry has come together to make their case. Even though they’ll compete passionately against each other in the market, they have to work collaboratively to create a regulatory environment in which they can compete and thrive,” said Brett Palmer, President of the Small Business Investor Alliance (SBIA), in an interview with LCD.

“The mark of a mature industry is recognizing a common interest.”

The next step for the current bill, HR 3868, is the passage by the full House of Representatives, which may come in the next few months. The strong support for the bill by the committee could reflect the bill’s chances of succeeding.

A short legislative calendar next year, in part due to the presidential election, could diminish the bill’s chances of full passage by January 2017. The previous bill expired with the expiration of that Congress. An even earlier version of the bill suffered from an introduction near the end of a congressional cycle, and also eventually expired.

However, working in the bill’s favor this time is the fact that it was marked up in the first session of this Congress, giving the bill all next year to work through full House and Senate votes.

“This may be slow, but it is a very good trend,” said Palmer. “The clock matters.”

Leverage increase: image problem?

The bill was the result of compromise to bring former opponents to the bill from the committee on board. But even with changes, it was not without critics, including from the SEC and state regulators. Proponents of the bill say they have met criticism with increased investor protection.

“Every time the SEC came back to us with changes, we made them,” said Rep. Mick Mulvaney (R-SC), the sponsor of the legislation, in the Nov. 4 markup.

Possibly the most important potential change in the works for BDCs is the asset-coverage requirement. The bill would effectively raise the leverage limit to a 2:1 debt-to-equity ratio, from the current 1:1 limit.

Moreover, existing rules dictate that BDCs invest at least 70% of total assets into “eligible portfolio companies,” leaving out many financial companies. The new bill aims to allow investments in 20% of certain finance companies. The bill would also allow a BDC to issue multiple classes of preferred stock, and streamline their registration process.

“It includes provisions I would have preferred were never offered. For example, I see no reason to allow BDCs to invest more assets in finance companies. However, by agreeing to cap the additional assets by 20% I think we will still preserve the character of BDCs as a useful mechanism for delivering funding to small businesses,” Maxine Waters, (D.-Calif.), Ranking Member of the House Financial Services Committee, said in the markup last month.

“I have bent over backwards for this bill, because I do want our small businesses have access to capital,” Waters said.

Jim Himes (D-Conn.), who voted against the bill, raised his reservations during the Nov. 4 markup. He said he had concerns with the bill mainly due to consumer protection issues.

“The underlying idea of expanding credit availability to small businesses through the BDCs is a good idea,” Himes said in an address to the committee at the markup. “They are fairly complicated instruments, but at the end of the day they end up in the hands of retail investors.”

The increase in leverage to 2-to-1 from 1-to-1 is actually a much larger increase in leverage than it appears, particularly in the 30% basket which could include leveraged businesses that are part of CLOs, Himes said.

“Of course it is banks that are lending to these BDCs, and they do their work. They’re not going to lend, hopefully, to BDCs that are behaving irresponsibly. But remember, that BDCs will chase yield… which means they have an incentive to lever up through that 30% bucket.”

Himes also expressed concern about the expansion of investment to financial services companies.

“This bill, which again, I think I can find my way to supporting, will simply make these instruments slightly more risky.

“More of these instruments will fail, and the retail investors will pay the cost for those additional failures. That may be ok so long as we’re comfortable with the idea that credit should be more available to the business. That’s the trade off,” Himes said.

Bill has bi-partisan support

Rep. Mick Mulvaney (R-SC), the sponsor of the bill, cites a 2013 tour of Ajax Rolled Ring and Machine as the moment he learned what a BDC was. At the time of Mulvaney’s tour, Ajax was controlled by Prospect Capital. Propsect’s investment in Ajax from April 2008 included a $22 million loan and $11.5 million of subordinated term debt.

The SBIA has long argued that BDCs are an important lender to small and mid-sized companies, a segment underserved since increased regulation on banks in the wake of the credit crisis. The middle market, which the SBIA defines as companies that generate $10 million to $1 billion of revenue, is growing faster than other parts of the economy.

Mulvaney stands by BDCs as an important source of credit for companies that are too big for their local bank but too small for a regional bank, capital markets, or national financial institutions. He believes modernization of BDC regulation is overdue.

“This is in a world now where other financial institutions that are competing for similar types of businesses are leveraged as much as eight or nine to one. It would seem fit today to expand that leverage slightly, slightly, to 2 to one, not eight to one or nine to one,” said Mulvaney at the markup.

“Another limitation we put on these entities when we created them for some reason was not to allow them to invest in financial institutions small and medium sized financial institutions, investment advisor firms… These are segments of our economy that badly need access to capital. The BDCs stand willing and able in a very sound way to provide those businesses with capital.

“This is a tool that we are not using adequately. This is a tool that we should be using,” Mulvaney said. — Abby Latour

Follow Abby on Twitter @abbynyhk for middle-market deals, leveraged M&A, BDCs, distressed debt, private equity, and more.

See also “BDCs head to Washington to make case to modernize rules,” LCD News, June 20, 2015.


Fresh & Easy files for Ch.11 in Delaware

Fresh & Easy filed for bankruptcy for the second time in as many years on Friday, announcing on its company website that it is seeking Chapter 11 protection to enable “the orderly wind-down” of its operations and sale of its assets.

The El Segundo, Calif.-based grocery chain filed with the U.S. Bankruptcy Court in Wilmington, Del, and listed between $100–500 million in liabilities, and less than $50 million in assets, court papers show.

Fresh & Easy, which was launched in 2006 by U.K. supermarket giant Tesco Plc, sold the majority of its stores to Ronald Burkle’s private equity firm Yucaipa Cos. as it emerged from its 2013 bankruptcy. An affiliate of Tesco provided Yucaipa with $120 million to help fund the acquisition.

Fresh & Easy’s demise comes just three months after Great Atlantic & Pacific Tea Co (A&P), which is also partly owned by Yucaipa Cos., among others, filed for bankruptcy protection in Manhattan. — Rachelle Kakouris