The persistently low oil prices continue to be a growing concern for the Business Development Companies (BDCs) owing to their exposure to energy-related industries. On Monday, oil tanked to $37.50 a barrel – hitting the lowest level in almost seven years – after a decision by the Organization of the Petroleum Exporting Countries (OPEC) last week not to cut back oil production.
Stock prices of several BDCs witnessed a slide on the same day. These BDCs included Triangle Capital Corp. TCAP (down 8.2%), PennantPark Investment Corp. PNNT (down 3.9%), Prospect Capital Corp. PSEC (down 3%), Apollo Investment Corp. AINV (down 6.1%), Main Street Capital Corp. MAIN (down 2%) and Ares Capital Corp. ARCC (down 2.5%).
According to KBW research, as of December 2014, the percentage of energy portfolio for PennantPark Investment, Main Street Capital, Apollo Investment and Triangle Capital stood at 17%, 15% 13% and 9%, respectively, while Prospect Capital and Ares Capital held 5% and 2%, respectively.
BDCs are closed-end funds primarily lending to small and mid-sized companies. BDCs are registered with the U.S. Securities and Exchange Commission (SEC) and fall under the regulatory purview of the Investment Company Act of 1940.
Following the 2008 crisis, BDCs grew as regulatory pressure limited banks' ability to lend to leveraged middle market companies. BDCs have caught attention given their high distribution yields. Notably, BDCs distribute at least 90% of their taxable income to shareholders.
Currently, the stock prices of several BDCs are trading grossly below their net asset value and hence limiting the capital raising activity, which is ultimately putting pressure on their investment activity. Apart from concerns over credit cycle, the depressed energy sector is currently a major headwind. Notably, last month, Fitch Ratings outlining such challenges, placed a negative outlook for U.S. BDCs in 2016.
The Fitch Ratings report, which was published on Nov 2, 2015, highlighting several issues in the BDCs , also stated, “the precipitous decline in commodity prices over the past 18 months has yielded the first notable crack in asset quality performance for those BDCs with outsized energy exposure, as Fitch has observed numerous write-downs since third quarter 2014 (3Q14).”
Essentially, an absence of rebound in oil prices will continue to result in underperforming energy investment for the BDCs. We do not foresee a significant improvement in the near term as the decision against a production cut by the OPEC members has further added to the market woes related to the oversupply of crude.
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