Non-listed BDCs added $3 billion in new middle market company investments in 2Q14, which results in a strong $10.7 billion in new middle market investments in the last year. Non-listed BDCs focused on debt investments, which represented 96% of all new investments for the quarter. Equity investments in middle market companies decreased moderately from 5% in 1Q14 to 4% in 2Q14. Stronger equity allocations provide opportunities for higher return potential to a non-listed BDC’s debt portfolio.
Non-listed BDCs continued a strong focus on first lien secured and second lien secured debt, which represented 54% and 28% respectively of new 2Q14 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 decreased from 577 basis points in 1Q14 to 566 basis points in 2Q14, and the average gross investment yields on first lien debt increased from 6.96% in 1Q14 to 6.81% in 2Q14.
Second lien debt, which has a subordinate claim to first lien debt, typically warrants a higher yield to reflect the higher investment risk. In 2Q14, credit spreads on second lien debt decreased from 746 basis points in 1Q14 to 738 basis points in 2Q14, and the average gross investment yields on second lien debt decreased from 8.53% in 1Q14 to 8.41% in 2Q14. Credit spreads between first and second lien debt loosened in 2Q14 to a 172 basis point credit spread differential between first and second lien debt.
Non-listed BDC investment data and analysis for 2Q14 is now available in MTS Research’s Non-Listed BDC Market Intelligence Report, which analyzes trends in credit spreads, LIBOR floors, investment yields, terms, floating and fixed rates, and fixed yields on unsecured debt and structured products. Their Non-Listed BDC Market Intelligence Report is available by subscription.
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.