Wednesday, April 30, 2014

Riddle Me This

I see that Franklin Square Investment Company (FSIC) now has an investment grade rating of BBB- from S&P and Fitch's.  This follows on Corporate Capital Trust's BBB- rating from S&P.  I'm trying to understand how the two business development companies (BDCs) raise equity and borrow money to make loans to non-investment grade companies and come away as investment grade companies.    (And at year-end 2013 CCT had 16% of its investment portfolio in investments with active payment in kind elections, but this is a whole separate topic.)  I guess the sum of the parts is greater - much greater apparently - than the parts by themselves.  It's like a sausage, no one wants to know how it's made or the ingredients used, just that the end result tastes good.  I'm reminded of this scene from the Wizard of Oz whenever I think too hard about BDCs: