BDC Financings & Securitizations

A business development company is a closed-end investment vehicle that lends to and invests in private and middle-market companies, regulated primarily under the Investment Company Act of 1940. Its financing needs special structuring because the 1940 Act caps a BDC's borrowing through an asset-coverage requirement, restricts certain affiliate and joint transactions, and governs how the BDC may pledge its portfolio. The capital stack of facilities, CLOs, and notes has to live inside those limits.

There are several layers, often used together. Senior secured revolving and term credit facilities supply the day-to-day borrowing. CLOs and asset-backed notes term out a pool of the BDC's loans through a bankruptcy-remote vehicle, and unsecured or convertible notes sit at the holdco level. We help a BDC and its manager choose the mix, document each layer, and keep the asset-coverage and covenant arithmetic consistent across the whole stack.

Asset coverage is total assets less liabilities that are not senior securities, divided by senior securities, which for most BDCs means all borrowings and any preferred stock. The statute requires 200 percent, or 150 percent after the board or shareholder approval the 2018 amendments allow, and it tests the ratio at two moments: immediately after each new borrowing and immediately after each dividend is declared. A BDC at 150 percent can therefore hold two dollars of debt per dollar of net assets. If marks fall and the ratio drops below the threshold there is no statutory breach, but the company cannot borrow another dollar or pay a distribution until it is back above the line, and its credit agreement almost certainly has its own covenant set tighter than the statute. In practice managers run the stack at a cushion to the covenant, not to the Act.

Yes, and many do. A BDC can transfer a pool of its portfolio loans to a bankruptcy-remote special-purpose vehicle that issues rated notes, terming out the financing and freeing capacity at the BDC level. The structure has to satisfy the true-sale and non-consolidation analysis, fit within the 1940 Act's pledge and affiliate rules, and meet rating-agency criteria. We coordinate that work alongside the BDC's facilities and disclosure.

Often. Many BDCs are registered or listed and file periodic disclosure, and changes to borrowing levels or a new offering can carry disclosure and approval obligations. Where a matter touches a regulator, we have represented clients in matters before the SEC, and we coordinate the financing, the 1940 Act analysis, and the disclosure so the capital raise and the public reporting stay aligned.

Yes. A BDC CLO commonly issues its notes through a Cayman Islands exempted company, often paired with a Delaware co-issuer for the senior classes, so that no tax is imposed at the issuer level between the loans and the noteholders; the Cayman company pays no Cayman tax and is structured not to be treated as carrying on a lending business in the United States, which is why it buys loans the BDC has already made rather than originating them. Cayman counsel forms the issuer, provides its share trustee and opines on it. We draft the indenture, the loan sale agreement and the parent's credit facilities so that the three documents agree on what has been sold, what has been pledged and what counts toward the parent's asset coverage, and we coordinate the offshore counsel rather than leaving the issuer's documents to run on a separate track.