Lending to small US businesses is making a comeback on Wall Street, with 12 investment firms arranging $1.38 billion (Dh5.06 billion) of initial stock offerings to funnel cash to the nation's biggest job creators.
Oaktree Capital Management LP, Crescent Capital Group LP and Churchill Financial Holdings LLC are forming so-called business development corporations (BDCs), which typically lend to businesses with annual revenue of less than $500 million, according to filings with the US Securities and Exchange Commission. The wave of BDCs is the largest in at least seven years, based on data from Ipreo Holdings LLC in New York.
While the Federal Reserve has flooded the financial system with trillions of dollars over the past three years, obtaining credit remains a challenge for many borrowers that don't have access to capital markets. A lack of credit is also hindering the labour market recovery, with unemployment hovering above 9 per cent. Companies with fewer than 50 employees accounted for more than half of new jobs created in the past decade.
"Capital needs to start getting down to the middle market and then below to the innovators," said Leon Wagner, who co-founded GoldenTree Asset Management LP, a New York hedge fund focused on debt markets. "That's what America needs to get deployed into the economy for significant growth to occur."
Small businesses have had fewer financing options since institutions such as CIT Group Inc. and CapitalSource Inc. cut lending following the 2008 bankruptcy of Lehman Brothers Holdings Inc. Companies with annual earnings before interest, taxes, depreciation and amortisation (EBITDA) of $50 million or less obtained $7.25 billion of syndicated loans in the US this year, while banks and investors supplied larger borrowers with $229.4 billion, according to Standard & Poor's Leveraged Commentary and Data.
Banks, trying to rebuild following $2 trillion of writedowns and losses since the start of 2007, continue to favour government and related bonds to making loans. Holdings of such debt has risen 44 per cent to $1.68 trillion since October 2008, while commercial and industrial loans outstanding have fallen 31 per cent to $1.26 trillion, Fed data show.
Those that can get loans paid 1.79 percentage points more in interest than large corporations in the first quarter, according to UBS AG, which is an attraction to Oaktree and the other debt investment firms faced with record-low yields on company bonds.
Small businesses are the backbone of the economy. Companies with fewer than 50 employees accounted for 64 per cent of private-sector jobs created in 2006, according to Automatic Data Processing Inc. This year, it's 48 per cent. Small businesses have struggled to obtain credit since business development funds were hit when credit markets seized up starting in 2008. CIT, the New York-based business lender, filed for bankruptcy in November 2009.
CapitalSource, the Chevy Chase, Maryland-based lender to small businesses, reduced total loans to $6 billion in the year ended in December, from $8.1 billion in 2009 and $9.3 billion in the prior year, according to data compiled by Bloomberg. Allied Capital Corp., one of the oldest BDCs, sold itself to Ares Capital Corp. in 2010, after its auditors said they had "doubt about the company's ability to continue as a going concern". Apollo Investment Corp. fell 92 per cent to a low of $2.05 on March 20, 2009 from a high of $24.13 on June 18, 2007. The company has since risen to $10.65 in Nasdaq Stock Market trading.
"I like the BDCs as a whole," said Michael Turner, a commercial finance analyst at Compass Point Research & Trading LLC in Washington. "The thing I'm always mindful of is, are we in the middle of a big bubble?"
Firms starting a BDC are typically able to double the amount of money they raise by selling stock through borrowing an equal sum. Average annual yields on BDCs range from 8 to 10 per cent.
There are 32 publicly traded BDCs, with the biggest being Ares and American Capital Ltd.
They pay little or no corporate income tax in return for distributing at least 90 per cent of taxable income to shareholders.
Financing for small companies may heat up as private-equity firms invest the more than $300 billion they have raised over the next three-to-five years, a portion of which may fund purchases of business with lower annual revenue, according to a JPMorgan Chase & Co. report published on May 31.
While Fed data show commercial and industrial loans are down from the peak in October 2008, they are up 4.7 per cent from the post-crisis low of $1.21 trillion in September.
From / Gulf News