BDCs that got funding prior to crisis ready for revolver rush

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Private credit firms that are flush with funds after raising money in debt markets just weeks ago may soon be asked to lend that cash to their middle-market borrowers.

Business development companies, which make up a $112 billion corner of the private credit universe, hit the high-grade bond market in droves earlier this year to manage their own debt loads. Now companies already in their credit portfolios need that cash to boost liquidity as the continuing spread of the coronavirus wreaks havoc on their businesses.

Fitch Ratings said in a report this week that the BDCs it tracks issued nearly $6.4 billion of term debt over the last 14 months, pushing out maturities for most of the vehicles the ratings grader follows.

“BDCs are now going to be able to fund draws on their revolvers, which have ticked up in recent days,” said Fitch analyst Chelsea Richardson in a phone interview. “Those could certainly continue and we don’t know how meaningful the borrower draws could get.”

Ares Capital Corp. and FS KKR Capital Corp., which recently tapped the investment-grade market, have $1.7 billion and $678.1 million in exposure to unfunded commitments, respectively, Raymond James & Associates said in a research note Thursday. Goldman Sachs BDC Inc., another firm that went to the high-grade market, said in a Thursday statement it has $68 million in unfunded commitments, no near term maturities and is “actively working” with the sponsors of its portfolio companies to address the evolving situation.

“As ‘cash crunch’ concerns persist due to the ripple effects of coronavirus,” borrowers that rely on BDCs “may find it beneficial to tap the entirety of their undrawn debt facilities to preserve liquidity,” Raymond James analysts Robert Dodd and Matthew Tjaden wrote in the note.

Representatives for Goldman Sachs BDC and FS KKR declined to comment. A request for comment from Ares Capital wasn’t immediately returned.

BDCs are likely to face pressure in the coming months on falling asset prices due the current virus pandemic, according to Fitch.

There are likely to be at least some temporary mark-downs in debt asset values when BDCs report first-quarter earnings later this year, with broader potential implications to come, Fitch analyst Meghan Neenan said in an interview.

“The credit picture is going to take a little bit longer to play out,” she said.

Bloomberg News