BDCs Issue Low-Yield Bonds

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bdc bonds 2017What would you want to be paid to lend to a BDC? It appears the answer is somewhere between 3.75% and 4.5%, based on recent filings by three BDCs that have dipped their toes into the convertible bond market.

  • Hercules Capital (HTGC) raised $230MM at 4.375% in 5-year paper due 2022. See filing here.
  • Ares Capital (ARCC) (ARCC) raised $350MM in 5-year paper at 3.75% due 2022. See filing here.
  • TPG Specialty Lending (TSLX) is raising about $100MM in a 5-year convertible note at 4.5% due 2022. See the filing here.

Credit spreads and cheap money

Tighter credit spreads are hurting their investment yields, but at the same time, leverage is getting stupidly cheap for BDCs.

Hercules Capital will use the proceeds to repay its baby bonds it issued before it had an investment-grade credit rating. The internally-managed BDC has two baby bonds (HTGY and HTGZ) that mature in April and September of 2017, both of which carry a whopping 7% coupon. Ares Capital appears to be levering up its balance sheet with cheap debt after its merger with the very unlevered BDC, American Capital.

TPG Specialty Lending is issuing new debt to pay off a credit facility. Given that it is operating near its leverage limits, and shares are trading above NAV, a secondary equity issuance might not be too far away.

Update: TPG Specialty Lending ultimately raised $115MM at 4.5%, which was disclosed in a filing after publication.

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