Blue Owl Capital Corp. II and FS KKR Capital Corp. are the latest business development companies to tap the US investment-grade market as blue-chip firms front-load deals ahead of key inflation data and the seasonal holiday slowdown in the US.
Blue Owl raised $350 million to redeem an equal amount of bonds maturing in 2024 while FS KKR borrowed $400 million to repay debt and for general corporate purposes, according to people with knowledge of the matter. Meanwhile, Oaktree Specialty Lending Corp. priced a $300 million deal to help repay its revolving credit facility in August.
Business development companies are a type of closed-end investment firm originally designed to provide capital to small and mid-sized companies considered too small or risky by banks and more traditional lenders. Their roots go back to the Small Business Investment Incentive Act, passed by Congress in 1980 to give a boost to middle-market businesses.
Blue Owl, FS KKR and Oaktree didn’t immediately respond to requests for comment.
It makes sense for more of these so-called BDCs to tap the market now to boost liquidity to help manage the turnover of their loan portfolios, according to Bloomberg Intelligence analyst David Havens. Bond maturities for the cohort should start to build in the next year and surge in 2025, he added.
“Things may get a little trickier in 2024 as zero-rate environment, Covid-Fed accommodation era loans roll over in a less conducive environment,” said Havens. “Having a little extra liquidity on hand may come in useful.”
The firms are among five issuers raising fresh capital in the high-grade bond market on Monday after 30 companies sold fresh investment-grade deals last week. Wall Street syndicate desks expect between $25 billion to $30 billion in new bonds to price this week, but borrowers will have to navigate market-moving economic data, including the consumer price index reading due on Tuesday.
On the surface, demand for new bonds seems better as subscription levels are high and the extra yield premium that borrowers have to offer to sell new debt narrows, according to Scott Kimball, managing director at Loop Capital Asset Management. But investors shouldn’t be quick to give up the new issue premiums.
“Flows have not been strong, and there’s plenty of yield available broadly across investment grade if you need to put cash to work,” said Kimball. “We draw a line at our fair value target and we won’t go through it. We’ll just buy discount bonds in the secondary market, which look a lot cheaper anyway.”
Oaktree Specialty Lending was forced to sweeten its $300 million deal in August after it failed to gain much traction, offering investors about 40 basis points in the so-called new issue concession, according to Bloomberg News analysis.
“Index-benchmarked managers need to get spread and if BDCs — at 300 basis points-plus — offer more than double the spread of BBB index — it’s tough to pass up,” said BI’s Havens.
--With assistance from Brian Smith and Michael Gambale.
(Updates to show deals have priced.)
