Business development companies managing through COVID-19

Business development companies weathering COVID-19

Since BDCs mainly provide debt financing to small and medium enterprises (SMEs), a segment hit hard by the virus, publicly traded BDCs faced significant price volatility at the start. Markets have since stabilized for BDCs, and we have yet to witness any existential crises, such as delistings or bankruptcies. But the crisis is far from over, as is evident by the hefty discounts at which some BDCs are still trading. The markets and many sell-side analysts alike are expecting that trouble may continue for the BDC sector through the next reporting period. The fact is that SMEs remain under significant revenue pressure from the pandemic.

Consequently, their ability to make loan payments is still an open question, and defaults and delinquencies could have increased during the second quarter of 2020, continuing into the third and fourth quarters.

Accounting matters for the BDC sector

In addition to keeping up with such regulatory updates, BDCs have had to grapple with accounting demands related to troubled loans and the acquisition of new portfolio companies affected by the COVID-19 pandemic. Here’s a quick look at both issues and how those in the BDC sector should be thinking about approaching them.

Troubled loans
BDCs will be working with their portfolio companies to assess and respond to the impacts of COVID-19 on their business operations. In certain instances, the portfolio company may have difficulty repaying its debt under the original conditions or default on covenants. BDCs may consider modifying the terms of the loans to further support the portfolio company rather than force a collection through other means.

BDC portfolio acquisitions, joint ventures, and other potential transactions
Consolidation of assets continues to happen across investment management firms, and BDCs are no exception. The economic downturn may lead to opportunities for acquisitions of entire portfolios or companies or to other combinations, collaborations, and transactions. Many business development companies traded at a discount to NAV prior to COVID-19, and the crisis has only widened these gaps, creating opportunities for consolidation.

COVID-19 consequences for business development companies

The COVID-19 pandemic and its economic repercussions are applying acute pressure on business development companies and their portfolio companies. Regulatory relief has been both timely and difficult to parse. In addition, the near-term environment has brought renewed attention to accounting for troubled debt taken out by portfolio companies, as well as the implications for acquisition activities.

Compliance can be a moving target during the best of times, but it’s particularly important to stay abreast of the latest developments during challenging periods such as the current one. BDCs that are able to stay on top of this rapidly evolving landscape will most undoubtedly emerge more competitive on the other side. The task, for now, is getting through it.