Monday, August 06, 2012

A Statistic To Watch

Several non-traded business development corporations (BDCs) have raised and invested enough capital that they are reporting meaningful results, and key performance metrics can be analyzed.  One statistic I find important is the average price, as a percentage of par, at which BDCs are buying their investments.  Par for a loan investment, like a bond, is typically the face value of the loan.  For example, if a bank, or BDC, or other entity makes a loan for $100, par is $100, because that is the price the borrower will repay when the loan matures.

When you have a loaded investment, like a non-traded BDC, the ability to purchase investments below par should help to offset the BDC's initial load.  As a simple example, if a BDC purchases a loan for $95 that has a $100 par value, it's buying the loan at 95% of par and the $5 difference earned when the loan matures could help partially recoup the BDC's initial load.

CNL's KKR-sub-advised BDC, Corporate Capital Trust, disclosed in a recent Form 497 filing that it has acquired its $426 million portfolio of investments at an average price of 100.1% of par.  So, its loan portfolio will mature at the price the BDC paid for the loans, assuming the loans are held to maturity.  There are other factors that could help recover or offset the load in this BDC other than just the average price as a percentage of par - skillful use leverage, a change in interest rates, realization of equity participations, or reserving excess interest, to name just a few - but it's an interesting figure to watch over time. 

Just because Corporate Capital Trust paid 100% of par for its investments doesn't mean it can't sell the loans for a premium, or that there are not other ways for the BDC to recover its load.  I need to find the same price-to-par ratio for other non-traded BDCs to determine whether all the BDCs are buying their investments at 100% of par.  

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