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Investing in sbic debentures of quality

investing in sbic debentures of quality

Barings BDC, Inc. is an externally managed, closed-end management investment company that has elected to be regulated as a business. As privately owned and managed investment funds that use capital with SBA debentures are non-amortizing securities with interest rates. What is the Value Proposition for a Bank to Invest in an SBIC Fund? ▫ What are Key Risks for Banks in Investing in SBICs? SPORTS BETTING ACRONYMS

The original program permitted only debenture leverage. As a result, the Participating Securities Program was designed to permit investing in equity securities whether or not those securities had a current pay component. This new program resulted in a large expansion of the number of SBIC licenses granted.

Following the burst of the "technology bubble" in , the Administration decided there no longer was a need for an equity SBIC program and that the existing Participating Securities Program would cause significant losses to SBA. Accordingly, SBA decided to terminate the Participating Securities Program and announced that beginning on October 1, , it would not issue commitments to use participating securities leverage or license new SBICs using that leverage.

SBA officials continue to emphasize that they believe the Debenture Program is working well, and they want to expand it. The governing law and regulations for the Debenture Program have undergone several revisions since that have further streamlined and improved the SBIC Program. SBA has continued its outreach to institutional investors, bank regulators, and prospective applicants in order to enlarge the existing Debenture Program and to create ways for SBICs to make certain kinds of equity investments without undermining the program's financial integrity.

Investment in an SBIC is specifically identified in the CRA regulations as a type of investment that will be presumed by the regulatory agencies to be a "qualified investment" for CRA purposes. The investment should be in an SBIC that is located in or doing substantial business in the region in which the bank's assessment area is located, but the SBIC is not required to be headquartered within the assessment area itself.

The SBIC Act and other federal statutes explicitly permit banks, bank holding companies, federal savings associations, and savings and loan holding companies to invest in SBICs. However, the amount of SBIC investments will be considered when determining capital charges for other investments. These rules, however, may be affected by contemplated changes to bank capital requirements to conform to the Basel III Accords.

The Dodd-Frank Act generally prohibits a banking entity from acquiring or retaining any equity, partnership, or other ownership interest in or sponsoring a private equity fund. In addition, nonbank financial companies that engage in proprietary trading, ownership, or sponsorship of a private equity fund may be subject to additional capital and quantitative limits. These prohibitions are not applicable to investments in SBICs. Effective October 1, , the Volcker Rule was revised to clarify that banking entities are permitted to retain their investments in a private fund that ceases to be licensed as an SBIC because it has voluntarily surrendered its license so long as the fund does not make any new investments other than in cash and cash equivalents after such voluntary surrender.

Also, before the enactment of the SBIC Advisers Relief Act, only advisers solely to one or more venture capital funds as defined by the SEC could rely upon the so-called "venture capital fund adviser exemption" from the Advisers Act's investment adviser registration requirements. A company failing that test can still qualify as a small business if it meets the size standards for its industry group under an alternative test.

The size standards for industry groups under this alternative test are based on the number of employees typically to 1, for a manufacturing company or gross revenues. Most importantly, in making a determination under the size test and the alternative test, the company and all affiliates of the company must be considered.

Companies are affiliates of each other if one controls or has the power to control the other, or a third party or parties control or have the power to control both. SBICs and private funds exempted from registration under certain sections of the Investment Company Act of are not considered affiliates of a company for purposes of determining whether that company qualifies as a small business or a smaller enterprise.

Certain debt-to-equity ratios must also be met if an SBIC finances the change of ownership of a small business with more than employees. SBIC regulations preclude investment in the following types of businesses: companies whose principal business is re-lending or re-investing venture capital firms, leasing companies, factors, banks ; various real estate projects; single-purpose projects that are not continuing businesses; companies that will use the proceeds outside of the U.

An SBIC and its associates [9] are permitted to control a small business for up to seven years. Upon request, SBA may allow for a longer period if doing so would permit an orderly sale of the investment or to ensure the financial stability of the small business. SBICs are precluded from making investments in a small business if it would give rise to a conflict of interest. Generally, a conflict of interest may arise if an associate of the SBIC has or makes an investment in the small business or serves as one of its officers or directors or would otherwise benefit from the financing.

Investing in an associate generally requires prior SBA approval unless an exception applies. Joint investing with an associate such as another fund controlled by affiliates of the general partner may be made on the same terms and conditions and at the same time or on terms that can be demonstrated to SBA's satisfaction that are fair and equitable to the SBIC. Terms of Portfolio Company Financings An SBIC may make investments in the form of debt with no equity features loans ; debt with equity features debt securities or stock, rights to acquire stock, and interests in limited partnerships, limited liability companies, and joint ventures equity securities.

Investments must be made for a term of at least one year except for bridge loans in anticipation of a permanent financing in which the SBIC intends to participate or to protect the SBIC's prior investment. Loans and debt securities must have amortization not exceeding the "straight line.

Regulations define an SBIC's weighted cost of debenture leverage and describe the maximum permitted rate when more than one SBIC participates in the financing. In addition, an SBIC may be reimbursed for its reasonable closing costs including legal fees. SBICs may also structure financings to receive a royalty based upon the improvement in the performance of a portfolio company after the financing. An SBIC is permitted to require a small business to redeem equity securities, but only after one year and only for a price equal to either a the purchase price or b a price determined at the time of redemption based on i a reasonable formula that reflects the performance of the company e.

Mandatory redemptions not complying with these requirements will result in the investment being treated as a debt security, subject to the maximum interest restrictions described above. However, the small business can be required to redeem the SBIC's equity security earlier than one year after its issuance if the small business has a public offering, has a change of control or management, or defaults under its investment agreement. Management is expecting higher portfolio growth over the coming quarters partially due to lower amounts of prepayments: Q.

So, if you ask me to make a prediction, my prediction is that we will not see a sustained level of exits and sales of investments at the June 30th level. Over time, in my experience, our assets tend to have a weighted average life between 2. These are excellent fixed rates for flexible unsecured borrowings due and However, there's a very good chance that GBDC had an excellent quarter with significant portfolio growth for improved earnings over the coming quarters.

Great question and the easy answer is "a meaningful improvement in dividend coverage" over the next two quarters. How meaningful? This is where you need to do your own due diligence to assess the impacts to dividend coverage. Obviously you're busy and maybe do not have time to put together a financial projection which is why many people use various research services that cover BDCs which can be difficult to find.

Especially services focused on BDCs as they are very different from other income-oriented investments. First of all, you need a service that will keep you up to date on information contained in the SEC filings as well as when BDCs start to report results which is starting next week. Please make sure that your service provides detailed financial projections for each of the BDCs that you plan to invest because historical coverage is not a good indicator of upcoming coverage.

I find that going out much further than three quarters is pointless as BDC balance sheets change constantly adapting for upcoming economic conditions. I typically do not provide financial projections in public articles but below is a quick example of the base case projections for GBDC taking into account the previously discussed information as well as the rest of the information provided in this article including changes to borrowing rates, net interest margin, and management fee agreement.

Again, historical dividend coverage is not a good indicator of upcoming coverage for many reasons including access to growth capital and temporary fee waivers discussed earlier so please make sure that you're getting this information before investing in BDCs. On Aug. This is an excellent fixed rate for flexible unsecured borrowings due This graph summarizes portfolio yields and net investment spreads for the quarter, focusing first on the light blue line.

This line represents the income yield or the actual amount earned on our investments, including interest and fee income, but excluding the amortization of upfront origination fees and the GCIC purchase price premium. The income yield decreased by 10 basis points to 7.

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