ATM programs appear to be growing in popularity for BDCs as a flexible, cost-efficient means to raise capital and manage leverage. Fifth Street Finance Corp. (IDR BBB-, Rating Watch Negative) and Apollo Investment Corp. (IDR BBB, Stable Outlook) were among the BDCs recently disclosing that they were contemplating establishing ATMs. Prospect Capital Corporation (not rated by Fitch) has also utilized an ATM program for some time.
Unlike traditional, single point-in-time equity underwritings, an ATM may permit BDCs to better match the flow of deals in their pipeline, thus reducing the earnings drag from excess cash and/or lower than optimal leverage following a more sizeable equity raise. In Fitch's view, the current competitive credit environment is adding to the attractiveness of establishing an ATM program, as the supply/demand imbalance in the market has yielded a more unpredictable forward pipeline. Elevated prepayment activity, due in part to heavy refinancing volume, has also contributed to the unpredictability of absolute portfolio growth.
Fitch recognizes that competitive factors and pressures from equity investors can be powerful determinants of how risk is taken and managed. BDCs are heavily reliant on the equity markets for growth, and a firm with a track record of raising dilutive capital may face challenges accessing the capital markets down the road. Therefore, a BDC with dry powder to invest and a dividend to cover may be more susceptible to making riskier investment decisions. If the deal environment remains competitive, this risk could become more acute.
ATM programs have been available to firms for many years, but gained further interest in 2005 when restrictions were lifted on the amount of securities that could be sold through the programs. Firms with ongoing capital management requirements in other industries, such as utilities, may also use ATMs.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
Source: Fitch Ratings
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