Despite elevated interest rates, business development companies, or BDCs, have seen a brisk pace of issuance of unsecured debt in 2024. This rivals the frothy market conditions of 2021 and exceeds the total issuance of unsecured debt by BDCs in 2022 and 2023, respectively.1 Whether the furious pace will remain, or whether new issuances will taper as benchmark rates decline, spreads widen and the U.S. prepares for the fall election, asset managers with either mature or new funds should consider certain preparatory steps to best position themselves to take advantage of this attractive funding source.

For larger funds, the ultimate goal for a successful transaction is to ensure that the issuance qualifies for inclusion in the Bloomberg US Corporate Index.2 By qualifying, the fund ensures the securities it issues will be more likely to experience a secondary trading market. Other considerations may prevail, but all else being equal, a more liquid trading market may improve the trading price of the issuance and therefore decrease the credit spread over the applicable benchmark rate that the fund will experience in future issuances. In order to be index eligible, the issuance must have at least one rating from any of Moody’s, S&P and Fitch, must have been issued in an initial aggregate amount of at least US$300 million, and must either be registered with the SEC or must be issued pursuant to Rule 144A and Reg S under the Securities Act of 1933 and include a registration rights agreement.

As a prelude to an index-eligible transaction, for a new fund or one that is still ramping, asset managers might consider offering unsecured notes by utilizing the National Association of Insurance Commissioners’ form note purchase agreement. The advantages of these transactions include that a fund can engage a rating agency other than one of the big three, which may ease the execution of the issuance, and will begin to diversify a fund’s leverage profile. This is particularly important as the big three rating agencies generally require BDCs to have unsecured debt equal to at least 30 percent of the fund’s outstanding leverage. One disadvantage of these ‘4(a)(2)’ notes transactions (a reference to the securities law private placement exemption pursuant to which the notes are issued) is that they often have tighter financial covenants than a typical index-eligible transaction. Nonetheless, by pursuing a 4(a)(2) notes transaction and engaging a knowledgeable bank early in the process, an asset manager can position its funds to access an additional source of leverage to attain its targeted return on equity earlier in the fund’s life.

For any questions regarding index-eligible bond offerings or unsecured notes offerings, please reach out to a member of Dechert’s private credit team for more information and market insights.