Fitch Ratings’ outlook for U.S. business development companies (BDCs) is Stable for 2011, as recent capital raises and leverage reductions have provided ample investment capital to deploy and improved overall operating flexibility. Fitch expects portfolio originations to outpace repayments for the full year, should risk-adjusted returns remain attractive in the market, which should support growth in net investment income and enhanced dividend coverage.
Public debt issuance in the BDC space has increased with the rising popularity of unsecured convertible notes. Prospect Capital Corporation was the first to access the convertible note market in the BDC space, pricing $150 million of five-year notes in December 2010. Ares Capital Corporation, Apollo Investment Corporation, Fifth Street Finance Corporation, and Hercules Technology Growth Capital have all since followed suit. Fitch believes opportunistic issuance in the space will continue, with the goal of improving funding flexibility and better matching liability structures with the average duration of portfolio company investments.
The improved availability of the debt and equity markets is likely to convert the usage of bank revolvers into temporary warehouse facilities, rather than longer-term funding sources. Leverage levels are expected to remain below longer-term historical targets in 2011, as valuation trends remain somewhat choppy in the middle market space.