BDCs may feel compelled to put too much money to work in risky ventures.
At the money (ATM) programs, which opportunistically tap the markets on an ongoing basis to take advantage of favorable borrowing opportunities, may hold the seeds of their issuers’ demise. Fitch Ratings says that business development corporations (BDCs) may be prompted by cheap funding to take outsized risks – upending the balance between cost of capital and risk.
One of the advantages of ATM programs for BDCs is that they eliminate or minimize negative arbitrage. In most cases, BDCs issue a load of stock and then put it to work over time. That means they sit on dilutive capital that is not put to productive means, at least at first.
An ATM program can allow a BDC treasurer to match deal-flow and fundraising more accurately. However, it can also spur a BDC to make inappropriate decisions. Fitch says, “…a BDC with dry powder to invest and a dividend to cover may be more susceptible to making riskier investment decisions. If the deal environment remains competitive, this risk could become more acute.”