Fitch: BDCs Expanding Lending Platforms for Growth
CHICAGO -- May 14, 2013
Tighter risk spreads and continuing signs of over-heating in debt markets have
led some U.S. business development companies (BDCs) to look for new growth
opportunities. Several BDCs, which are largely cash flow lenders to
middle-market companies, have expanded their platforms through acquisitions of
asset-based lenders, with a focus on senior loan products, according to Fitch
Ratings. Over time, BDC's commitments to these types of investments are likely
We see the expansion of BDC platforms as a positive driver of increased
middle-market loan diversification at a time when frothy credit markets have
raised the risk of increased asset quality problems for leveraged loans.
Still, these acquisitions bring an added layer of leverage to BDCs, given
borrowings at the lender level. These investments are generally accounted for
as equity investments, which could yield more valuation volatility for the
firms quarter to quarter.
BDC portfolio growth has slowed recently as a result of increased prepayment
activity in a low interest rate environment where refinancing volumes have
been high. Asset quality trends for BDCs have improved, and portfolio
concentrations have ticked down.
The top 10 investments of Fitch-rated BDCs, on average, totaled 37.1% of
assets and 59.6% of equity as of year-end 2012. While the acquisition of
asset-based lenders decreases portfolio diversification because the
acquisitions are accounted for as portfolio company investments, Fitch
believes the concentration risk is somewhat mitigated by the fact that the
underlying portfolio is relatively diverse, consisting of loans to a number of
Fifth Street Finance Corp's announced acquisition of HealthCare Finance Group
(HFG), an asset-based lender to healthcare providers, for approximately $110
million, is the latest example of BDCs' desire to expand the platform through
acquisitions of specialty lenders. HFG's outstanding loan portfolio of
approximately $270 million was comprised of 57 loans to multiple borrowers at
May 6, 2013. The Fifth Street acquisition follows a similar expansion seen in
Solar Capital's $275 million December purchase of asset-based lender Crystal
Capital Financial Holdings, whose $400 million portfolio included 23 loans at
Other diverse portfolio company investments include Ares Capital Corporation's
partnership with an affiliate of GE Capital Corporation, valued at
approximately $1.3 billion at March 31, which invests primarily in unitranche
loans to middle-market borrowers across a number of industries. American
Capital Ltd. (ACAS) also has a diversified portfolio of European senior loans
in its European Capital (ECAS) investment, which was valued at approximately
$918.7 million at March 31.
In the near term, we believe BDCs may also look to deploy capital into
products that complement their current platforms, including, energy/project
lending products, aircraft leasing and/or equity REITs.
We completed a peer review of BDCs on May 6. For a detailed review of rating
rationale and credit profiles of rated BDCs, see the special report "Business
Development Companies (A Comparative Analysis: 2012)" dated May 6, 2013, at
The above article originally appeared as a post on the Fitch Wire credit
market commentary page. The original article can be accessed at
www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
Applicable Criteria and Related Research
Business Development Companies (A Comparative Analysis: 2012)
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Katherine Hughes, +1 312-368-3123
Bill Warlick, +1 312-368-3141
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