Golub Capital BDC (GBDC) and Rand Capital (RAND) got some good news from the Small Business Administration (SBA), both moving closer to tapping the Small Business Investment Company program for cheap debt leverage.
Golub Capital BDC announced that it received approval for a third SBIC license (GC SBIC VI, L.P.), which will grant it the ability to borrow up to $50 million of leverage through SBIC debentures. Rand Capital said it received the “green light” or “go forth” letter to work towards getting its second SBIC license. A smaller BDC, Rand Capital noted that it would tap the program for just $15 million in capital after contributing $7.5 million of equity capital.
All about SBICs
SBICs are intended to make it easier for small businesses to find capital necessary to maintain and grow their businesses. The SBIC program enables approved managers to leverage private capital at 2:1, and thus borrow $2 of leverage for every $1 of private capital. Recently, the SBIC program was expanded so that SBIC managers could borrow up to $350 million across three licenses. (See this primer from the SBA.)
The best part about the program is that the capital is cheap because of SBA (federal government) guarantees. SBIC debentures are issued at a small premium to 10-year U.S. Treasuries, and have a tenor of 10 years. The most recent SBIC debentures were issued in September 2016, and carry a coupon of 2.051%. Add in some modest fees and expenses for the issuance, and it still remains the cheapest way for BDCs to leverage their portfolio. Most investment-grade BDCs pay 2-2.5% coupon premiums to issue 5-year bonds. Ten-year bonds would be even more expensive. BDCs that don’t have an investment-grade rating would find it hard to raise a credit facility on more attractive terms than the SBIC’s 10-year debentures. It really is that cheap!
Unlike other forms of debt, SBIC debentures can be excluded from the asset-coverage ratio calculation by the SEC. Therefore, even though BDCs are limited to $1 of debt for every $1 in equity, SBIC debt can be excluded from this calculation, giving BDCs more balance sheet flexibility and potentially more leverage than generally allowed.
Sound complicated? It is. All you really need to know is that the SBIC program is the best thing BDCs have going for them. Every BDC should participate in the program. This is good news for Golub, Rand, and their shareholders.