First-lien assets take the cake in a year with strong H1 origination numbers…
Assets originated by business development companies are still overwhelmingly first-lien loans. Four of the past five quarters, those assets have been more than 70 percent of the new originations.
The snapshot shows that BDCs may be sensitive to market sentiment as they originate assets. The fourth quarter of last year, when volatility reigned, and the second quarter of this year, with the hint of worrying economic data, saw the largest number of first-lien assets originated.
Total origination for the year appears relatively robust, if not on track to meet last year’s total. The $19.19 billion originated in the first half of the year is more than the total amount of assets originated in 2016 and almost three-quarters the amount originated in 2017.
…which is causing an uptick in total first-lien assets held
As the credit cycle has worn on, the amount of first-lien loans held by BDCs has increased. Looking back at the fourth quarter of 2016, only 54.14 percent of total BDC assets were first lien; by the second quarter of this year, that number had increased to 66.56 percent.
The amount of subordinated debt has noticeably decreased from 12.72 percent down to 5.47 percent. Part of the decrease may have come from BDCs with heavy mezzanine exposure like Triangle Capital Corporation (now Barings BDC) being sold.
More BDC assets trade at distressed prices on the secondaries market than among all the secondaries market holdings
Of the overall secondaries market, 2.7 percent is considered distressed. For BDC assets, however, that number is 4.8 percent. Among those names are retail and energy businesses – two sectors that have seen more than their share of financial distress in recent years.
FS Investments’ private business development companies – FS Investment Corporation II, FSIC III, FSIC IV and FS Energy and Power Fund – lead the way in holdings of the top 10 loans that have lost the most value this year. The FS vehicles hold five of the 10 positions.
Institutional investors are getting BDC fever
BDC capital raised by type can fluctuate annually, but in recent years institutional investors have warmed to the vehicles. While many institutional investors prefer private funds, the total institutional capital collected by BDCs has risen since 2015. That increase has come in both the actual dollars raised and the percentage of private institutional capital compared with other sources of BDC capital.
A number of BDCs have taken advantage of this in recent years as they raised substantial capital in the private markets before going public, the most recent two being Bain Capital Specialty Finance and Owl Rock Capital Corporation.