SEC Steps in to Help Struggling Loan Funds
April 09 2020 - 4:05PM
Dow Jones News
By William Louch
The Securities and Exchange Commission is stepping in to help
out business development companies that have been battered by the
recent economic turmoil.
Business development companies, or BDCs, typically raise money
from public stock investors that they then lend to small, often
private, U.S. companies. Shoring up the finances of small and
medium-size businesses has become a central part of the U.S.
government's strategy to reduce the impact of the coronavirus
pandemic on the economy.
The Federal Reserve announced a raft of programs Thursday that
collectively will provide $2.3 trillion in assistance to small and
midsize businesses.
The SEC said late Wednesday that it is providing "temporary
relief" that will make it easier for the BDCs to issue and sell
securities and continue lending to small and midsize companies.
The SEC measures will allow BDCs to invest in these companies
alongside private funds that are affiliated with them. Many of the
largest BDCs are managed by private-equity firms such as Apollo
Global Management Inc., Blackstone Group Inc. and KKR &
Co.--which hold most of their assets in private-equity and credit
funds that aren't publicly traded.
Over the past decade, BDCs have come to play an important role
in the U.S. economy, stepping in to provide financing to companies
after large banks pulled back in the wake of the financial crisis
that began more than a decade ago.
They also provide mom and pop investors with the opportunity to
tap into high-yielding private markets that are usually only open
to large, sophisticated institutions.
But the ongoing shutdown has prompted these funds to stop
lending to businesses at a time they need it most.
"Many small and medium-sized businesses across the country are
struggling due to the effect of COVID-19, and today's temporary,
targeted action will enable BDCs to provide their businesses with
additional financial support during these times," SEC Chairman Jay
Clayton said in a statement.
"The method for calculating the level of permitted financing and
the other important conditions included in the order are designed
to ensure that this temporary relief will both protect and benefit
investors in the BDCs."
BDCs have pulled back from making new loans as they focus on
supporting existing investments they have made that are now at risk
of default, according to a report released Tuesday by credit rating
agency Fitch Ratings Inc.
"Middle-market activity was virtually zero in March," the Fitch
report said. "While deal volume is expected to increase once social
distancing guidance is eased, many BDCs will not have the ability
to participate in new originations as they continue to triage and
support existing portfolio companies."
The uncertainty has caused shares in BDCs to fall sharply. They
have been among the worst-affected in the recent stock market
selloff as concerns rise about a wave of defaults among indebted
U.S. businesses.
Some of the largest BDCs, including FS KKR Capital
Corp.--managed by KKR & Co.--and BlackRock Capital Investment
Corp., have seen their share prices fall nearly 50% since the
beginning of the year. The S&P 500 has fallen around 15% over
the same time.
Before the Fed and SEC announcements, Fitch warned that BDCs
might have to stop paying investors dividends as some of their
portfolio companies went bankrupt.
"The severe economic contraction resulting from the coronavirus
pandemic will lead to increased credit losses for the sector and
pressure some BDCs' ability to maintain dividends," the ratings
agency said.
The decision to help BDCs is the latest in a series of measures
the SEC has taken to mitigate the impact of the coronavirus
pandemic on the U.S. economy. Previous measures the regulator has
implemented include giving public companies extra time to file
annual reports and other major disclosures.
The SEC extended similar relief to some filings required of
investment advisers and mutual funds if their operations have been
affected by the pandemic.
Write to William Louch at william.louch@wsj.com
(END) Dow Jones Newswires
April 09, 2020 15:50 ET (19:50 GMT)
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