Non-listed BDCs added $2.3 billion in new middle market company investments in 1Q14, which follows a strong $9.6 billion in new investments for 2013. Non-listed BDCs focused on debt investments, which represented 95% of all new investments for the quarter. Equity investments in middle market companies increased moderately from 3% in 2013 to 5% in 1Q14, as non-listed BDCs look to capture stronger equity allocations for higher total return potential.
Non-listed BDCs continued a strong focus on first lien secured and second lien secured debt, which represented 38% and 28% respectively of new 1Q14 investments. First lien debt has a priority claim on a borrower’s collateral and provides the best protection in the event of a bankruptcy. Credit spreads on first lien debt increased from 553 basis points in 4Q13 to 577 basis points in 1Q14, and the average gross investment yields on first lien debt increased from 6.80% in 4Q13 to 6.96% in 1Q14.
Second lien debt, which has a subordinate claim to first lien debt, typically warrants a higher yield to reflect the higher investment risk. In 1Q14, credit spreads on second lien debt decreased from 782 basis points in 4Q13 to 746 basis points in 1Q14, and the average gross investment yields on second lien debt decreased from 8.86% in 4Q13 to 8.53% in 1Q14. While credit spreads between first and second lien debt tightened in 1Q14, second lien debt had a 169 basis point higher credit spread.
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Article by Michael Stubben, President of MTS Research Advisors
MTS Research Advisors is a provider of data and analytics for non-traded REITs and BDCs.