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Money Harder to Raise for BDCs as Stock Indexes Dump, Fitch Says

Business-development companies, which lend to smaller firms that can’t tap public markets, will probably find it harder to raise money after being removed from the Standard & Poor’s U.S. indexes, according to Fitch Ratings.

S&P’s decision took effect at the end of February, affecting BDCs including Apollo Investment Corp. and Prospect Capital Corp., Fitch said today. BDCs also will become ineligible for Russell Indexes unless the Securities and Exchange Commission removes a fee-reporting requirement for the funds by May 15.

BDCs have raised more than $15 billion of equity since 2007, helping to fill a void in the middle market as banks pulled back after the financial crisis because of tougher capital rules, Fitch said. A total of 33 BDCs could be removed from indexes, probably making it more expensive for them to raise money as investors will be less interested in investing in the firms, according to the ratings company.

“Reduced equity liquidity could impact growth rates and the companies’ flexibility to raise equity to support existing investments or capitalize on investment opportunities,” Fitch said.

S&P Dow Jones Indices said Feb. 24 it was removing the funds from its U.S. indices because of client concerns about reporting requirements, expenses and investment restrictions.

“Forced sales of BDC shares from the indices will likely pressure share prices in the near term,” Fitch said. “A reduction in trading volumes may impact the cost of raising equity in the future, as investors seek a premium to hold relatively less-liquid shares.”

While legislation permitting BDCs to increase borrowing limits could help them to expand, “a supportive equity market will still be necessary for balanced future growth,” according to Fitch.

Shares of Apollo Investment fell 6 cents to $8.49 at 3:28 p.m. in New York trading, while Prospect Capital declined 3 cents to $10.78.

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