1、Financial Institutions March 29, 2010 U.S.A. Special Report Business Development Companies A Comparative Analysis 2009 Overview Business development companies (BDCs) have been through a tumultuous six quarters. The global credit crisis ignited a steep decline in market valuations, which yielded the
2、 recognition of a significant amount of unrealized portfolio depreciation at BDCs. The resulting decline in equity accounts inflated leverage ratios and pushed most into capital preservation mode. Origination activity was brought to a virtual standstill in 2009, as many BDCs sought to monetize portf
3、olio investments. Cash proceeds were used to deleverage balance sheets and build cushions on asset coverage requirements. Fitch Ratings took several negative rating actions in the BDC space in 2008 and 2009 as a result of market conditions. In some cases, declines in portfolio valuations reduced equ
4、ity accounts to the point where covenants were pressured and/or tripped and needed to be renegotiated to avoid acceleration of payment. As 2009 progressed, market multiples and yields did begin to shows signs of stabilization, and modest unrealized portfolio appreciation began to materialize in the
5、BDC space in 3Q09 and 4Q09. While Fitch believes further unrealized depreciation is a possibility, given the uncertain economic environment, BDCs with lower leverage, less exposure to more volatile equity investments, and demonstrated access to equity markets should see origination activity increase
6、 in 2010. Rating stability is expected to be driven by the maintenance of solid asset coverage cushions, earnings consistency, an improvement in asset quality, and a demonstrated ability to access the debt and/or equity markets for growth capital. Comparative Analysis This report details a comparati
7、ve analysis of eight publicly traded BDCs in the U.S., each of which is also considered a regulated investment company (RIC) for tax purposes under Subchapter M of the Internal Revenue Code, which requires the annual distribution of at least 90% of investment company taxable income to shareholders t
8、o avoid corporate taxes. Under the provisions of the Investment Company Act of 1940, BDCs must have an asset coverage ratio of at least 200%, which is equivalent to a maximum debt to equity ratio of 1:1. Failure to maintain asset coverage prohibits the BDC from incurring additional indebtedness. Rat
9、ings Long-Term IDR Allied Capital Corporation American Capital Strategies, Ltd. Apollo Investment Corporation Ares Capital Corporation BlackRock Kelso Capital Corporation Gladstone Capital Corporation MCG Capital Corporation Prospect Capital Corporation B+ C BBB BBB PR NR BB+ NR Rating Outlook Allie
10、d Capital Corporation American Capital Strategies, Ltd. Apollo Investment Corporation Ares Capital Corporation BlackRock Kelso Capital Corporation Gladstone Capital Corporation MCG Capital Corporation Prospect Capital Corporation PositiveaNone Stable NegativeaPR NR Negative NR aRating watch. PR Priv
11、ately rated. NR Not rated. Analysts Meghan (Crowe) Neenan, CFA +1 212 908-9121 William A. Artz +1 312 368-3178 Sadia Afridi +1 212 908-0327 Related Research Applicable Criteria Global Financial Institutions Rating Criteria, Dec. 29, 2009 Investment Manager and Alternative Funds Criteria, Dec. 30,
12、 2009 Recovery Ratings for Financial Institutions, Dec. 30, 2009 Other Research Business Development Companies: A Comparative Analysis, Sept. 3, 2008. BDC Third-Party Asset Management: Risk and Reward, Nov. 7, 2007. The ABCs of BDCs, Sept. 15, 2006. Issuer Rating Changes: Long-Term IDR Start of 2008
13、 End of 2008 Mid 2009 Currently Rating Outlook Change from Beginning of 2009 Allied Capital Corporation BBB BBB BB B+ Negative Rating Outlook to Positive Rating Watch American Capital Strategies, Ltd. BBB BBB BB C Negative Rating Outlook to No Rating Outlook Apollo Investment Corporation NR BBB BBB
14、BBB Negative Rating Outlook to Stable Rating Outlook Ares Capital Corporation NR NR NR BBB Negative Rating Watch MCG Capital Corporation BBB BB+ BB+ BB+ Negative Rating Outlook NR Not rated. Financial Institutions The following sections will cover portfolio size, growth, composition, concentrations,
15、 asset quality trends, profitability metrics, funding, leverage, liquidity, valuation, and asset coverage. BDCs covered include American Capital Strategies, Ltd. (ACAS), Allied Capital Corporation (ALD), Apollo Investment Corporation (AINV), Ares Capital Corporation (ARCC), BlackRock Kelso Capital C
16、orporation (BKCC), Gladstone Capital Corporation (GLAD), MCG Capital Corporation (MCGC), and Prospect Capital Corporation (PSEC). A brief summary of each is included in the Appendix on page 22. Size and Growth of Investment Portfolio At Dec. 31, 2009, ACAS was the largest publicly traded BDC in the
17、U.S., with nearly $5.6bn in portfolio investments at value and $9.2bn of investments at cost. ACAS had investments in approximately 185 portfolio companies with an average size of $30.1m, based on value. AINVs portfolio was about one-half the size of ACAS, at $2.8bn, but it had the largest average i
18、nvestment size, at about $40.3m at value. AINV targets larger companies for investment purposes, as it believes those companies are better positioned to withstand cyclical downturns in the economy. Fitch recognizes the benefits of investing in larger, well-known companies, although sizable investmen
19、ts may be more difficult to liquidate in a single transaction. GLAD had the smallest portfolio, with an average investment size of $6.7m for 46 portfolio company investments. BDC portfolios contracted rather significantly on a fair value basis over the past two years, given adverse movements in mark
20、et yields and valuation multiples and due to weaker underlying portfolio fundamentals resulting from the difficult economy. The BDC portfolios contracted an average 10% in 2008 and 9% in 2009 after expanding 38% in 2007. ALD, ACAS, and MCGC have experienced the most significant portfolio contraction
21、 over the past two years, as each has conducted asset sales to reduce leverage. MCGC was never out of compliance with its covenants, but it began liquidating assets to repay debt earlier than peers did, given dislocations in the CLO market. This is evident from its portfolio contraction on a cost ba
22、sis. MCGCs portfolio contracted 7% in 2008, while most others continued to grow or experienced only modest contraction. ALDs portfolio declined the most on a fair value basis, contracting 27% and 39% in 2008 and 2009, respectively. ALD fell out of compliance with asset coverage in the fourth quarter
23、 of 2008 and aggressively liquidated positions to repay debt and reduce leverage. ALD experienced significant fair value reductions in its largest portfolio investment at cost, Ciena Capital LLC, which filed for bankruptcy in September 2008. The investment, valued at $100.1m, is now being carried at
24、 18.3% of its cost basis. ALD has also experienced material writedowns on its relatively large portfolio of collateralized debt obligation (CDO)/CLO investments, which amounted to $159.1m at year end and are carried at 42.6% of cost. Investment Portfolio Profile ($000, As of Dec. 31, 2009) Fair Valu
25、e Portfolio No. of Companies Average Size Fair Value Average Size Cost ACAS 5,575,000 185 30,135 49,503 AINV 2,822,175 70 40,317 48,010 ALDa2,075,311 100 20,753 36,099 ARCC 2,171,814 95 22,861 25,015 BKCC 846,742 57 14,855 18,506 GLAD 306,638 46 6,666 7,554 MCGC 986,346 70 14,091 16,499 PSEC 648,135
26、 55 11,784 11,521 aExcludes real estate portfolio. Source: Company filings. 2 Business Development Companies March 29, 2010 Financial Institutions Investment Portfolio Annual Growth (%, Fiscal Years Ended Dec. 31) At Fair Value 2003 2004 2005 2006 2007 2008 2009 Average ACAS 45 158 58 58 35 (32) (25
27、) 43 AINVaN.A. N.A. 86 51 38 (24) 11 32 ALD 4 17 20 25 6 (27) (39) 1 ARCC N.A. N.A. 221 111 44 11 10 79 BKCC N.A. N.A. N.A. 201 46 (16) (9) 56 GLADb37 34 37 8 61 17 (21) 25 MCGC 1 27 25 15 24 (22) (18) 7 PSECcN.A. N.A. 43 145 52 10 17 53 Average 22 59 70 77 38 (10) (9) At Cost 2003 2004 2005 2006 20
28、07 2008 2009 Average ACAS 53 58 59 52 37 0 (14) 35 AINVaN.A. N.A. 85 48 51 (0) (1) 37 ALD 7 19 4 42 12 (3) (26) 8 ARCC N.A. N.A. 219 114 44 26 5 82 BKCC N.A. N.A. N.A. 201 54 7 (15) 62 GLADb37 36 38 5 65 30 (21) 27 MCGC (1) 23 24 11 27 (7) (21) 8 PSECcN.A. N.A. 41 164 52 7 19 57 Average 24 34 67 80
29、43 7 (9) aFiscal years ended March 31; 2009 represents nine months ended Dec. 31, 2009. bFiscal years ended Sept. 30; 2009 represents fiscal year ended Sept. 30, 2009. cFiscal years ended June 30; 2009 represents six months ended Dec. 31, 2009. N.A. Not available. Source: Company filings. ACAS exper
30、ienced a 32% drop in its portfolio fair value in 2008, which also yielded noncompliance with asset coverage limitations in the fourth quarter of 2008. However, ACAS was not aggressively liquidating portfolio company investments until the latter part of 2009, as it hesitated to sell investments at di
31、stressed prices. Asset sales gained traction in the second half of the year, and ACAS has accumulated $835m of cash at year end, which would be needed for principal payments if the terms of the current debt renegotiation package are approved. ARCC and PSEC recorded positive portfolio growth in 2008
32、and 2009 on both a cost and fair value basis. ARCCs portfolio grew an average 16% annually over the past two years, at cost, and PSECs portfolio expanded 13%. While both have experienced periods of quarterly unrealized portfolio depreciation, leverage cushions have been sufficient to allow for oppor
33、tunistic investments in a tough market. ARCCs portfolio expanded in 2009, in part due to the acquisition of certain assets from ALD in preparation for the April 2010 merger. PSECs portfolio increased in 2009 due largely to the acquisition of Patriot Capital Corporation (Patriot), which closed on Dec
34、. 2, 2009 and added $207.1m of portfolio investments. Fitch monitors portfolio trends closely, as aggressive growth during boom periods may lead to significant swings in portfolio valuation during a slowing economy, a risk that emerged in the current downturn. In particular, aggressive portfolio gro
35、wth by ACAS in 2006 and 2007 led to significant reductions in its portfolio value in 2008, which inflated leverage above BDC limitations and led to covenant breaches. Fitch believes it is critical for BDCs to stick to their underwriting philosophies in frothy markets, as a more conservative growth s
36、trategy during periods of heightened market activity may leave a BDC with ample capital to invest when competition slows and risk-adjusted returns become more attractive. Business Development Companies March 29, 2010 3 Financial Institutions Portfolio Composition BDC portfolio compositions change ov
37、er time as BDC strategies evolve and market conditions change. For example, the lack of market activity in recent quarters has led to an increase in yields and a corresponding decrease in leverage for senior debt investments. Some BDCs have limited their senior debt exposures in the past because BDC
38、 leverage limitations have not made investments as economical for the balance sheet. However, widespread repricing of risk in the market since fall 2008 has yielded more attractive risk-adjusted returns on all classes of debt. The market downturn also led to declines in market multiples, which reduc
39、ed company enterprise values and had the most outsized impact on equity investments, given their position in the capital structure. As a result, BDCs with the largest equity exposures, like ACAS, MCGC, and ALD, have incurred the most significant decline in portfolio fair value, which led to each bre
40、aching asset coverage limitations at some point during the cycle. Fitch expects BDCs to manage equity exposures more conservatively going forward, and material upticks in portfolio equity exposures, not accompanied by reductions in leverage, could result in negative rating actions. At Dec. 31, 2009,
41、 senior debt accounted for 43.8% of average investment portfolios. Senior debt can be secured or unsecured and has a priority repayment claim, therefore it typically earns a lower investment yield than subordinated debt. BDCs with concentrations in senior debt typically have lower debt portfolio yie
42、lds. For example, BKCC and GLAD had debt yields of 9.4% and 10.6%, respectively, with senior debt accounting for 79.8% and 68.8% of their total portfolio. ALD has the least amount of portfolio exposure to senior debt, at 13.4%, as it had sold the lower-yielding assets to its senior debt fund, which
43、was managed off-balance sheet. ALD sold this fund to Ivy Hill Asset Management, L.P. in December 2009, a portfolio company of ARCC. Portfolio Compositions at Fair Value (%, As of Dec. 31, 2009) Debt Equity Senior Unitranche Subordinated CLOs Preferred OtheraDebt Yield ACAS 32.6 0.0 34.3 3.0 18.8 11.
44、3 11.0 AINV 28.5 0.0 56.8 0.9 3.1 10.7 11.6 ALD 13.4 17.4 50.7 4.2 1.3 13.1 11.9 ARCC 49.4 7.6 27.4 2.4 3.4 9.8 12.1 BKCC 79.8 0.0 15.7 0.0 0.7 3.9 9.4 GLAD 64.8 0.0 34.8 0.0 0.0 0.5 10.6 MCGC 38.5 0.0 31.0 0.0 26.2 4.3 11.9 PSEC 43.7 0.0 39.5 0.0 0.9 15.9 15.6 Average Unitranche debt falls between
45、senior and subordinated debt on the liquidation hierarchy and typically has components of both. ALD has historically been an active originator of unitranche debt, and ARCCs exposure represents its investment in an off-balance sheet fund comanaged with GE Commercial Finance Investment Advisory Servic
46、es LLC, which it purchased from ALD in late 2009. 43.8 3.1 36.3 1.3 6.8 8.7 11.8 aOther equity includes common stock, warrants, and limited partnership interests. Source: Company filings. Subordinated debt offers a higher return potential but is underwritten at higher leverage levels than senior deb
47、t. Subordinated debt accounted for 36.3% of the average BDC portfolio at year-end 2009. AINV has 56.8% of its portfolio invested in subordinated debt, which it believes offers the most attractive risk-adjusted returns. 4 Business Development Companies March 29, 2010 Financial Institutions The averag
48、e debt portfolio yield amounted to 11.8% at year-end 2009, although some BDCs report the yield on a cost basis while others report the yield on a fair value basis. PSEC had the highest portfolio debt yield at Dec. 31, 2009, amounting to 15.6%, given its conservative underwriting culture. ARCC had th
49、e second-highest debt portfolio yield, at 12.1%. Fitch believes ARCC has a higher-than-average yield because it has been a more active investor in the current market, which has offered more attractive returns. Equity securities, which include preferred stock, common stock, warrants, and other participation interests, are more common in buyout investments whereby the BDC may gain control of the portfolio company. Equity securities may or may not provid
