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- The current high interest environment has fueled the growth of the private credit market from $875 billion to over $1 trillion in a short time, with a projected $2.8 trillion market by 2027-28.
- Business Development Company (BDC) launches have proliferated to address the demand to fill the financing gap left by banks withdrawing from riskier corporate lending practices.
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Basel 3 international banking accords and inflation-fueled interest rate hikes from the Federal Reserve have created a high interest, risk averse corporate lending environment. Increased capital reserve requirements for banks have made them more choosy over how to allocate loans. Greater deal complexity that has flummoxed sophisticated banks, like SoftBank’s We Work fiasco, has caused a banking industry gun shy fear about non-Fortune 500 corporate lending.
To fill the niche gap for corporate finance, the private debt and credit markets have exploded over the last few years from $875 billion to over $1 trillion. Analysts predict that the market will continue to expand to $2.8 trillion in the next 3-4 years.
Business Development Companies – Supplying Private Debt and Credit
Business Development Companies (BDC) are the main public company players in the private debt field. They are the private debt equivalent to REITs in the real estate arena. With deep pockets and experienced financial flexibility, BDCs often provide much needed capital to private corporations for a range of activities that might be too expensive or too complex for commercial bankers to handle. In exchange for access to capital from the public markets, a BDC registration with the SEC requires that 90% of BDC profits be remitted to shareholders.
With the huge influx of new BDC players in a quickly expanding market, risk dynamics, competition for clients, and client expectations are in flux. BDC interest rates will inevitably reach a market range. Therefore, innovative flexible strategies and resources that can combine debt capital with equities, warrants, or even barter may all become tools for closing future deals.
The areas where BDCs are focusing their business at present are:
- Middle Market Companies – As the major banks consolidated, many small and middle market corporate clients were dropped as not being viewed as profitable enough to maintain. Smaller banks lack the sophistication for certain corporate finance requirements, such as executive buyouts, revolving credit line refinance, inventory finance, and other activities. At the same time, they are too small for larger banks, but BDC’s can find much fertile ground for business in these areas.
- Strategy Flexibility – the use of customized strategies and financial structures for clients that some banks would deem too risky or complex are BDC offerings that are becoming popular. Mezzanine debt, asset-backed securities, hybrid debt and equity structures, and other types of constructs to solve problems in an other than cookie-cutter approach is winning over many corporate clients.
- Special Situations – Temporary cash crunch situations or distressed asset situations where a minimal amount of emergency capital can right the ship back to corporate profitability are the projects where BDCs are going to shine over larger banks who are inclined to use mark-to-market accounting on their books.
24/7 Wall Street has covered numerous BDC’s in the past within the context of high dividend income generation. For income oriented investors, it is a sector that demonstrates rapid growth with consistently high yields. The 13 BDCs listed below as a sample portfolio have an average 11.8% APY, based on market prices and yields with $10,000 investment per stock at the time of this writing.
Portman Ridge Finance Corporation
Stock #1 : Portman Ridge Finance Corporation (NASDAQ: PTMN)
Yield: 14.42%
Number of shares for $10,000: 522.46
Annual Dividend Amount: $1,442.00
Portman Ridge Finance Corporation is a BDC that has been steadily building its reputation as a solid dividend stock, much to the delight of satisfied shareholders. From its Madison Ave. office, just a block away from New York’s famed Plaza Hotel, the company utilizes Unitranche debt structures (which can be on FILO basis), as well as First Lien, Second Lien, Subordinated Debt, structures, and may also co-invest equity as well.
Average deal size is $1 million to $20 million for Portman Ridge Finance Corp. Qualifying clients must meet the following criteria:
- $5 million – $25 million EBITDA
- History of stable financial performance and consistent cash flows
- Favorable market dynamics with identifiable and defensible market positions
- Management with demonstrable track record history.
Prospect Capital Corporation
Stock #2 : Prospect Capital Corporation (NASDAQ:PSEC)
Yield: 14.40%
Shares for $10,000: 2,000
Annual Passive Income: $1,440.00
Located just a few blocks from Grand Central Station in New York City, Prospect Capital Corporation is a Business Development Corporation (BDC). As such it competes with other BDCs in the private corporate finance arena. This often entails origination of secured debt, senior debt, mezzanine debt, first lien debt and other types of loan structures for later stage and emerging growth companies. Some examples of use of proceeds can include leveraged buyouts, refinancing, recapitalizations, acquisitions, turnarounds, bridge loans, and other corporate needs. The company also invests in multi-family residential real estate.
Prospect Capital claims that it is industry sector agnostic, but clearly prefers North American company clients. Its sweet spot for investing is between $10 million and $500 million per transaction for a solo investment. Prospect will also do larger deals via syndication and/or agented basis. Qualifying prospect companies must have EBITDA between $5 million and $150 million, enterprise value between $5 million and $1 billion, and sales value between $25 million and $500 million.
There have been recent concerns over PIK (payment-in-kind) debt payments from some clients that Prospect Capital has addressed as a non-issue, due to its strong financing sources and a pending upcoming bond sale, which will provide even further liquidity.
As a testament to its dividend consistency and reliability, Prospect Capital Corporation has unfailingly paid its monthly dividend for 84 consecutive months to date.
PennantPark Investment Corporation
Stock #3 : PennantPark Investment Corporation (NYSE: PNNT)
Yield: 13.62%
Shares for $10,000: 1,418.4
Annual Passive Income: $1,362.00
PennantPark is a Business Development Company (BDC) with an equities appetite that has it operate often as a private equity company, rather than, ironically, a public company. The Miami Beach, FL based BDC engages in direct senior secured loans, mezzanine debt, and equity investments. These financings can manifest in an array of configurations: preferred stock, warrants, options, senior secured debt, mezzanine loans, and other types of debt securities, as well as direct equity investments. The company even advertises that its due diligence process is very much borrowed from the private equity industry, including viable exit strategies for its equity financier portions.
In general, PennantPark considers financings and investments of between $10 million and $100 million in companies with EBITDA of between $10 million and $50 million, but it can go up to $250 million. Industry agnostic, PennantPark financings range from real estate, technology, telecom, casinos, entertainment and media, oil & gas, healthcare, pharma, transportation, aerospace, manufacturing, and food and beverage, to name a few.
WhiteHorse Finance, Inc.
Stock #4 : WhiteHorse Finance, Inc. (NASDAQ: WHF)
Yield: 13.28%
Shares for $10,000: 863.55
Annual Passive Income: $1,328.00
Headquartered in Miami, FL, WhiteHorse Finance, Inc. is a Business Development Company that finances lower and mid-tier companies with growth capital in the form of senior secured notes or first lenient notes. It typically originates its debt underwritings in the the $25 million to $50 million range for US companies in the $50 million to $350 million enterprise value category. It has deployed its $660 million portfolio to finance $2.66 billion across 140 transactions since going public in 2012.
WhiteHorse’s preferred industrial sectors are in retail, business office, and healthcare related supplies and services, building supplies, cable & satellite, software, leisure, and data processing outsource services.
Somewhat outside the norm for the BDC arena, WhiteHorse will sometimes engage in turnaround scenarios, such as American Crafts, Atlas Purchaser. Additionally, WhiteHorse partnered in a joint venture with State Teachers Retirement System of Ohio, a public pension fund, in 2019, referred to as the WHF STRS JV. The portfolio of the JV alone has grown to $312 million as of the end of 2023.
Goldman Sachs BDC, Inc.
Stock #5 : Goldman Sachs BDC, Inc.(NYSE: GSBD)
Yield: 13.01%
Shares for $10,000: 722.54
Annual Passive Income: $1,301.00
Similarly to its platform rivals, Goldman Sachs BDC engages in private corporate finance underwritings and originations of secured debt, both senior and junior, first in-last out unitranche debt, mezzanine debt, and, in limited quantities, equities. Candidates for Goldman Sachs BDC to invest anywhere between $25 million to $75 million in financing, are, by and large, US companies. Annual EBITDA for qualifying companies should be between $5 million and $75 million.
Horizon Technology Finance Corporation
Stock #6 : Horizon Technology Finance Corporation (NASDAQ: HRZN)
Yield: 11.82%
Shares for $10,000: 853.2
Annual Passive Income: $1,182.00
Horizon Technology Finance Corp. is a BDC with a focus on venture capital backed high-tech startups and development stage companies. Its primary interest sectors are: high technology, life science, healthcare technology, and sustainability.
Horizon’s debt financings can be up to $50 million per transaction, and in the form of fixed term, bridge, or special purpose loans with an elevated priority claim interest over equity shareholders or other lenders. Use of proceeds include: growth capital, acquisition, cash extension, and non dilutive equity funding augmentation.
Since 2004, Horizon Technology Finance Corp. has directly originated and invested more than $3 billion in venture loans to more than 315 growing companies.
Carlyle Secured Lending, Inc.
Stock #7 : Carlyle Secured Lending, Inc. (NASDAQ: CGBD)
Yield: 11.26%
Shares for $10,000: 599.16
Annual Passive Income: $1,126.00
Best known for its involvement with its aerospace and defense industry investments, NY based Carlyle Group (NASDAQ: CG) is also a huge asset management company that spans many industrial sectors and has investments from all over the world. Like its large private equity and asset management peers, Carlyle Group often tries to leverage its financial clout and brand recognition in other areas to compete with rivals across all financial platforms. Carlyle’s asset management team has stakes in most every industry and asset class that can be profitable. With a $1.78 billion AUM portfolio, Carlyle Secured Lending, Inc. is Carlyle Group’s entry into the BDC arena.
On the debt finance origination side, Carlyle prefers to use lien debt, senior secured notes, second lien secured or unsecured note configurations, and mezzanine loans. It will also consider equity investments. Preferred sectors include: Middle market healthcare, pharmaceutical, aerospace & defense, business services, software, gaming and leisure, high tech, real estate, and banking & finance companies from the US, UK, Luxembourg, Cyprus and Cayman Islands are the current scope of interest.
Eligibility qualification is for EBITDA between $25 million and $100 million.
MidCap Financial Investment Corporation
Stock #8 : MidCap Financial Investment Corporation (NASDAQ: MFIC)
Yield: 10.96%
Shares for $10,000: 724.63
Annual Passive Income: $1,096
Benefitting from its close affiliations with both lender MidCap Financial and Apollo Global Asset Management, the MidCap Financial Investment Corporation is a Business Development Company with a $2.44 billion AUM portfolio warchest. The company will invest in the form of first lien loans (97% of portfolio), secured and unsecured debt, collateralized loan obligations, credit linked notes, and other loan structures, as well as PIPE (Private Investment in Public Equity) deals. Debt maturities average between five and ten years. 100% of its financing deals are floating rate.
MidCap Financial Investment Corporation will invest between $20 million and $250 million in primarily, but not exclusively, US businesses with $75 million EBITDA or less. Primary industries of interest are High Tech Industries (19.6%) and Healthcare & Pharmaceuticals (16.6%).
Golub Capital BDC Inc.
Stock #9 : Golub Capital BDC Inc. (NASDAQ: GBDC)
Yield: 10.66%
Shares for $10,000: 683.52
Annual Passive Income: $1,066
Golub Capital BDC Inc. has been at the forefront of this trend. In 2023, Golub Capital won all three Lender of the Year, Senior Lender of the Year, and BDC Manager of the Year in the Americas awards from Private Debt Investor (PDI), and has won 24 PDI awards since 2013.
One of the keys to Golub’s success are its One-Stop Loans, which are secured by priority first liens on the issuer’s assets. They comprise 86% of Golub’s portfolio, so its defaults are abnormally low for the industry. Another fact to consider is that Golub raised its dividend twice in 2023, so business has been good for them.
90% of Golub Capital’s deals are first lien senior note floating rate loans. The company’s invested capital, including leverage, is in excess of $70 billion.
CEO David Golub is bullish on the company. He registered an insider buy of over $8 million worth of GBDC stock in June, 2024.
Barings BDC Inc.
Stock #10 : Barings BDC Inc. (NYSE: BBDC)
Yield: 10.43%
Shares for $10,000: 1,003
Annual Passive Income: $1,043
Although it is currently owned by MassMutual Insurance, Barings has a long history as a British merchant bank, dating back to the late 1700’s. The original Barings helped the U.S. finance the Louisiana Purchase and was one of the first European companies to do business in China and Japan.
Registered as a Business Development Company, Barings BDC engages in senior secured debt, mezzanine debt, first lien debt and other types of finance for private corporations. Use of proceeds can range from Leveraged Buyouts, management buyouts, acquisitions, growth finance and recapitalizations to Employee Stock Ownership Plans.
Barings BDC’s focused financing targets are US companies with EBITDA between $10 million and $75 million in manufacturing, technology, business services, transportation and logistics, and consumer services. Maturities average between 5 and 7 years, while interest income target is normally LIBOR +450 basis points to LIBOR +650 basis points per annum.
As of July, Barings BDC boasted a 12-month shareholder return of 28% and an industry low 5-year monthly beta of 0.70, indicating extraordinarily minimal volatility. 24/7 Wall Street previously published an in-depth look at the company.
Bain Capital Specialty Finance, Inc.
Stock #11 : Bain Capital Specialty Finance, Inc. (NYSE: BCSF)
Yield: 10.24%
Shares for $10,000: 609.38
Annual Passive Income: $1,024.00
When Mitt Romney launched his 2012 presidential campaign, it was the first time that Middle America first learned about his founding of Bain Capital. Touting his HCA hospital chain turnaround as an example of his business acumen for solving the US government’s economic woes, Romney’s overall track record proved to be spotty. Although the Boston, MA based private equity and asset management firm had been doing business since 1984, Bain’s role in some highly publicized LBOs (ex: Guitar Center, Toys ‘R’ Us, Clear Channel and Burlington Coat Factory) wound up losing thousands of jobs and saddling high interest debt on companies. The negative history was seized upon by journalists as red meat for their readers.
Despite these high profile flops, Bain Capital has remained in the game and has since been able to thrive, and competes with its rivals on all market fronts. Bain Capital Specialty Finance, Inc. is Bain’s BDC arm.
Target middle-market corporations that meet BCSF’s qualifying criteria, which includes EBITDA between $10 and $150 million, can receive financings in a variety of forms. First or second lien positions on collateral, mezzanine debt, senior first or second lien, stretch senior, senior second liens, unitranche, and others.
Blue Owl Capital Corporation
Stock #12 : Blue Owl Capital Corporation (NYSE: OBDC)
Yield: 10.20%
Shares for 10,000: 689.17
Annual Passive Income: $1,020.00
Of the $13.9 billion AUM Blue Owl Capital has on its books, slightly over half is devoted to the credit markets. As a Business Development Company, New York based Blue Owl deploys a range of debt origination tools that include: senior secured loans, unsecured, subordinated, and mezzanine loans, and will also use preferred stocks, warrants, and direct equity.
Use of proceeds can be growth based acquisitions, product or market expansions, recapitalizations, or refinancings.
Blue Owl prefers middle to upper tier US client companies with $10 million to $250 million EBITDA, or $50 million to $2.5 billion in annual revenues. The company’s deal size sweet spot is between $20 million and $250 million, with debt maturities between 3-5 years.
Blue Owl Capital Corp. announced a merger with sister company Blue Owl Capital Corporation III (NYSE: OBDE), which is scheduled to consummate Q1 2025, with OBDC as the designated surviving entity.
Ares Capital Corporation
Stock #13 : Ares Capital Corporation (NASDAQ: ARCC)
Yield: 9.26%
Shares for $10,000: 483.3
Annual Passive Income: $926.00
Ares Capital Corporation is the Business Development Company (BDC) arm of alternative asset management titan Ares Management. It operates throughout the US regionally from its New York, Chicago, or Los Angeles offices. Its $13.13 billion market cap and $25 billion AUM portfolio rank it as one of the largest US BDCs on the market.
Ares typically makes combined debt and equity investments between $20 million and $200 million, with a maximum of $400 million per deal. Qualifying companies with an EBITDA between $10 million and $250 million. It makes sole debt investments between $10 million and $100 million.
The financings and investments can take the standard variety of equity and debt manifestations, but Ares is also more adventurous, innovative and risk tolerant than its peers. For example, Ares will sometimes deploy revolving credit lines for financing its client companies. Additionally, Ares will consider third-party senior and subordinated debt financings and heavily discounted distressed debt, which carries commensurately higher risk. Ares is also not a passive investor. It prefers to be the primary agent or lead on any deal in which it commits to, and will demand proportional board representation once engaged.
49.8% of the company’s portfolio are First Lien senior secured loans, with Second Lien senior secured loans at 12.1%. Industry-wise, Software and Services is the largest sector with 24.2%, followed by Healthcare at 12.6% and Commercial & Professional Services at 10.6%.
| Name: | Yield: | Annual Dividend Amount: |
| Portman Ridge Finance Corporation (NASDAQ: PTMN) | 14.42% | $1,442.00 |
| Prospect Capital Corporation (NASDAQ:PSEC) | 14.40% | $1,440.00 |
| PennantPark Investment Corporation (NYSE: PNNT) | 13.62% | $1,362.00 |
| WhiteHorse Finance, Inc. (NASDAQ: WHF) | 13.28% | $1,328.00 |
| Goldman Sachs BDC, Inc.(NYSE: GSBD) | 13.01% | $1,301.00 |
| Horizon Technology Finance Corporation (NASDAQ: HRZN) | 11.82% | $1,182.00 |
| Carlyle Secured Lending, Inc. (NASDAQ: CGBD) | 11.26% | $1,126.00 |
| MidCap Financial Investment Corporation (NASDAQ: MFIC) | 10.96% | $1,096 |
| Golub Capital BDC Inc. (NASDAQ: GBDC) | 10.66% | $1,066 |
| Barings BDC Inc. (NYSE: BBDC) | 10.43% | $1,043 |
| Bain Capital Specialty Finance, Inc. (NYSE: BCSF) | 10.24% | $1,024.00 |
| Blue Owl Capital Corporation (NYSE: OBDC) | 10.20% | $1,020.00 |
| Ares Capital Corporation (NASDAQ: ARCC) | 9.26% | $926.00 |
| Total: | $15,356 |
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