Think

A new public Business Development Company (“BDC”) has arrived on the credit fund scene: the clumsily named TCG BDC (ticker: CGBD), sponsored by Carlyle Global Credit, which itself is an affiliate of the Carlyle Group, one of the largest asset managers out there. CGBD announced its initial public offering on June 5, 2017 and closed the sale of 9,000,000 shares two weeks later on June 19th . With the addition of CGBD, the BDC Reporter’s universe of publicly-traded BDCs that we cover daily increases to 46. The new player – based on the market capitalization table on the handy Closed-End Fund Advisors BDC Universe data page – will begin as the seventh largest public BDC vehicle, with a book value just under $1.2bn. (Don’t look for CGBD on the CEF Advisors table yet. The BDC is to new to yet figure in).   To introduce readers to the new BDC on the block, we have reviewed the Prospectus in some detail. There is a great deal to cover, so the BDC Reporter will be breaking this primer on Carlyle’s public BDC into several parts. In Part I we’ll begin with History/Formation, and move on to Strategy.  In latter articles we’ll look at Compensation, Corporate Governance, Credit Risk and Financial Performance.  As we hope to show by going carefully through each category is that an in-depth exploration will ultimately  contribute to an investor’s assessment of the risks and returns to be expected from Number 46. First, though, we have to become better acquainted with the CGBD story:

In Part I of our bromide about the Biggest Threat to the BDC sector we showed how leveraged lending to middle market companies has become increasingly popular amongst a range of old players and new players, less than a decade after lending was left for (almost) dead by the Great Recession. Furthermore, we added that the combination of additional sources of capital flooding into the sector combined with a limited supply of transactions was affecting the 45 public BDCs we tracked. More ominously, we suggested the “biggest threat” to those BDCs was contained  in this change of circumstances. Let us proceed to identify the guilty party. We warn you, it may not be what or whom you expected.

On June 5, 2017 BlackRock Capital Investment (BKCC) filed an 8-K regarding an amendment to the BDC's principal financing arrangement - to which all non-SBIC pledged assets are secured : the Second Amended and Restated Senior Secured Revolving Credit Facility, or Revolver for short. The BDC Reporter reviewed the routine change made to the Revolver, which is discussed below. However, we also used the opportunity to scan through some of the critical terms of BKCC's loan agreement. The goal was to determine what institutional lenders to a BDC like BKCC are looking out for and seeking to protect themselves against, which can be instructive for the shareholders of this or any other BDC:

After the close on May 30, 2017 MVC Capital (MVC) announced a drastic switch in its complex plan, discussed on the BDC Reporter on May 17, 2017 to merge U.S. Gas & Electric, Inc. with Equus Total Return, a dormant BDC which MVC controls.  Here are the initial details analyzed by the BDC Reporter within two hours of the release:

The press of constant developments across the BDC sector has greatly diminished with the end of earnings season. Where the BDC Reporter would wake to multiple new press releases, SEC filings, corporate presentations and analyst recommendations, we now have a blessedly short list of items to review and consider. In fact, we’re already done with the news flow on Wednesday May 25th and nobody is yet even at lunch on Wall Street. This is giving us the opportunity to write about a subject we’ve been meaning to discuss for several weeks. To keep readers awake and focused we’re going to break this into two parts. First, we’re going to review the drastic change in the popularity of leveraged lending in the middle market that has occurred in the past 8 years. In the second part, we’ll seek to explain why BDC investors should be worried in the short, medium and long term, and how they might be able to protect themselves.