On March 23, 2018, President Trump signed into law the Consolidated Appropriations Act of 2018, which contains as Title VIII thereof the Small Business Credit Availability Act. The Small Business Credit Availability Act, among other things, significantly increases the amount of debt that business development companies (BDCs) may incur. Prior to the enactment of the Small Business Credit Availability Act, a BDC could generally incur debt only if after giving effect thereto its ratio (the Asset Coverage Ratio) of (i) total assets less liabilities other than debt to (ii) total debt, would be at least two times.
The Small Business Credit Availability Act reduces the Asset Coverage Ratio to 1.5 times if the following conditions are met:
- Not later than five business days following the applicable approval referred to below, the BDC discloses such approval and the effective date of the approval in a filing submitted to the Securities and Exchange Commission under Sections 13(a) or 15(d) of the Securities Exchange Act of 1934 and in a notice on the website of the BDC.
- The BDC discloses, in each periodic filing required under Section 13(a) of the Securities Exchange Act of 1934, the following:
- The aggregate outstanding principal amount of debt and liquidation preference of preferred stock issued by the BDC and the Asset Coverage Ratio as of the date of the BDC’s most recent financial statements included in that filing
- That the BDC has approved a 1.5 times the Asset Coverage Ratio
- The effective date of such approval
- With respect to a BDC that is an issuer of public common equity securities, each periodic filing of the BDC required under Section 13(a) of the Securities Exchange Act of 1934 includes disclosures that are reasonably designed to ensure that shareholders are informed of:
- The amount of debt and the Asset Coverage Ratio of the BDC determined as of the date of the most recent financial statements of the BDC included in that filing
- The principal risk factors associated with its debt
- If the BDC approves the 1.5 times the Asset Coverage Ratio by its board and not its shareholders, the reduction in the Asset Coverage Ratio from two times to 1.5 times cannot become effective until one year after the date of the board approval.
- If the BDC obtains shareholder approval, the reduced Asset Coverage Ratio may become effective on the first day after the date of the approval.
- If the BDC is not an issuer of common equity securities that are listed on a national securities exchange, it must extend to each person that is a shareholder as of the date of approval of the opportunity (which may include a tender offer) to sell the securities held by that shareholder as of the applicable approval date, with 25 percent of those securities to be repurchased in each of the four calendar quarters following the calendar quarter in which that applicable approval date takes place.
This change in law may have a significant impact in the non-bank direct lending market, as BDCs are a common vehicle used by non-bank lenders. BDCs will now be able to increase their assets by up to one-third with additional debt and no new equity raised.