Do BDCs have a debt maturity issue on its hand? A recent Fitch Ratings report found that is indeed the case as some $1.3 billion of convertible notes and other debts from select BDCs are about to reach maturity. The sum totals the 2011 and 2012 issued notes from four reputable BDCs: Apollo Investment, Ares Capital, Fifth Street Finance and BlackRock Capital Investment.
Ares led the group with $805 million worth of maturing notes, with Apollo the second-highest with $229 while the other two face $100-plus each. The concern from Fitch comes due to each BDC trading below its book value during a mid-September assessment which would limit its ability to raise equity if a BDC could not refinance its maturity debt.
The Fitch report went on to lay out a bleak prospect where refinancing options were limited. The belief is that several issues, including, “competitive underwriting conditions, outsized energy exposures, increased valuation marks, potential dividend pressures, and unsustainable asset quality metrics, may also weigh on debt investors, which could make it more challenging for BDCs to economically refinance maturing convertible notes and private placement debt with public market issuance.”
From our perspective, it is hard to comment on another BDC without having its inner knowledge. Whether or not there ultimately is a debt maturity “wall”, current prospects remain positive, certainly for our company as we continue to find a receptive market for our own bonds.
We believe most BDCs will navigate these bond maturities and continue to provide high quality financing to the middle market companies in need of funding. While the maturity wall could sway some from the sector, banks and other investment sources face further regulation and scrutiny when dealing with certain asset classes and thereby continue to provide investment opportunities for BDCs. 2016 will be a major year for the sector as it may also be a year of evolution in financing across the board.