Highlights from BDC Publications: BDC Reporter, BDC Credit Reporter and BDC Best Ideas.

We’re especially proud of the Gladstone Investment (GAIN) post where we reached beyond the perfunctory information provided in a press release to provide a full picture of a newly acquired portfolio company by the BDC.

There’s also the first of what we expect will a series of unsecured debt issuance stories. Mark our words, 2025 is going to prove a very difficult year for BDCs seeking to raise new unsecured notes and difficult decisions will have to be made about timing of going to market; tenor; amounts involved and whether to swap into floating or note. Making the wrong decision – which will only be clear next year with the benefot of hindsight – could materially crimp earnings.

1/2/2025: Gladstone Investment Corporation Acquires the Ricardo Defense Business

BDC Reporter Adds: BDCs – like Gladstone Investment (GAIN) – are prone to issuing press releases about new acquisitions but are typically closed-mouth about providing much in the way of useful detail to investors. That’s the case here with the acquisition of Ricardo Defense Systems, LLC and Ricardo Defense Inc. The wording of the press release implies GAIN also acquired Proteus Enterprises, LLC. However, we get the impression Proteus is the vehicle through which GAIN will own the acquired businesses alongside one or more of the senior managers of Ricardo. The President of the company – Chet Gryczan – announced the acquisition on the company’s LinkedIn page, with a completion date of January 1, 2025. Elsewhere, we learned that the businesses were sold by a British company – the Ricardo Group – for a price of $85mn, to be paid in cash less normal transaction costs. We even learned that the transaction was structured as a stock – not an asset – sale. The stock acquired was that of Ricardo US Holdings, a wholly owned subsidiary of the parent. (That’s a little unusual by the way). According to a press release announcing the divestment we learned: “Ricardo Group plc is a global strategic, environmental, and engineering consulting company, listed on the London Stock Exchange. With over 100 years of engineering excellence and close to 3,000 employees in more than 20 countries, we provide exceptional levels of expertise in delivering innovative cross-sector sustainable outcomes to support energy transition and scarce resources, environmental services, together with safe and smart transport solutions. Our global team of consultants, environmental specialists, engineers, and scientists support our customers to solve the most complex and dynamic challenges to help achieve a safe and sustainable world. Visit www.Ricardo Group.com.”

Apparently, the seller will be using the proceeds to acquire “85% of E3 Advisory, a leading Australian infrastructure advisory firm”. Apparently the Ricardo Group is seeking to become “a world-leading strategic and engineering consultancy in environmental and energy-transition services” and is stepping away from its defense oriented business, which does not match its strategic ambitions. We also learned in the public record that Ricardo was considered by the sellers too “capital intensive”. However – we also know the defense business was highly profitable, partly due to the receipt of a major new contract granted in 2023, whose final delivery seems to be in 2026. In a press release the seller reported that the business sold accounted for 26% of its total sales and 60% of its “operating profit”. Here are the specifics: “In FY 23/24, Ricardo Defense contributed revenue of £123.4 million and an underlying operating profit of £23.5 million to the Group, reporting an underlying operating margin of 19%. The gross assets of the Ricardo Defense Business as at 30 June 2024 were £29.5 million.”

We also learned that “Headquartered in Troy, Michigan, USA, Ricardo Defense has circa. 240 colleagues and its business’s operations are located mainly across the United States, with some field-services operating internationally, providing product and technical services across the various defense platforms”.

Because we have seen the P&L and balance sheet of the company being sold, it is clear that GAIN is acquiring the business at a low multiple of earnings. However, we cannot tell from the numbers revealed what capex might be and non-cash expenses so we can’t determine the EBITDA or working capital. Moreover – and one of the reasons we would stay away from companies serving the military – the bulk of the revenues of the company are derived from contracts with a finite life. In FY 2024 sales revenues increased by 50% due to the new contract but what goes up can come down. Moreover, should the government be unsatisfied with Ricardo there is the very real risk of not getting paid for a period – the risk of being at the end of contracts that have very specific requirements and due dates. With that said, there are many PE groups that are very successful in this segment and GAIN has served the defense markets before. This may prove a very successful investment and continue the BDC’s long track record of realized equity gains. In any case, at this point – thanks to the fact that the seller of Ricardo is a public company and has to report all the information listed above – we know more about this new acquisition than any of GAIN’s other businesses.

GAIN

1/2/2025: Ares Capital Corporation Prices Public Offering of $1 Billion 5.800% Unsecured Notes Due 2032

BDC Reporter Adds: Even a billion dollar unsecured note issuance is small beer for Ares Capital (ARCC) given the BDC’s size. Its total debt is $13.5bn so this new issuance – which will probably pay down floating rate secured debt initially but will also help the needed repayment of $1.850bn in notes coming due – will likely not move its earnings needle materially or much affect the structure of its balance sheet. A billion dollars is a routine matter for ARCC’s CFO.

More interesting is that i) the BDC has chosen to borrow 7 years out – all the way to 2032. This new note will become the longest dated fixed rate debt on its books. This looks like a careful protection against the very real risk that Trumpenomics is on its way to blowing upwards the course of interest rates. Just have a glance at the course of the 5 or 10 year Treasury rate since November 4. Things could get worse which shouldn’t be a huge problem for ARCC but may weigh on the many other BDCs coming hat in hand to the debt markets in 2025, 2026 and beyond.

ii) We are impressed – but not surprised – how inexpensively ARCC was able to borrow. By our count, the BDC is paying only 133 basis points over the risk-free rate, much better than the 1.7% sought in its initial term sheet.

With the portfolio yielding 11.3% – but likely to drop to 11.0% thanks to the recent cut from the Fed – the net spread after the management fee, direct costs and incentive fee should be about 3.2%. That’s not very good for shareholders, but illustrates the modest incremental earnings when using borrowed monies.

ARCC, FIXED INCOME

1/3/2025: Leading Independent Proxy Advisory Firms ISS and Glass Lewis Recommend that Shareholders Vote “FOR” the Pending Merger between OBDC and OBDE

BDC Reporter Adds: We doubt this merger is very controversial amongst the shareholders of Blue Owl Capital (OBDC) and Blue Owl Capital III (OBDE). Nonetheless, there is a great deal of money involved so getting the blessing of “independent” proxy advisory firms makes sense for the players involved.

OBDC, OTHER

1/4/2025: U.S. Bankruptcies In 2024 And How BDCs Fared.

BDC Credit Reporter Free Article – Available To All

We’ve weaved together an article from Reuters about U.S. bankruptcies in 2024 with what happened in the BDC sector. We also share our thoughts about what matters – and what does not – when peering into the credit crystal ball.

MULTIPLE BDC, CREDIT