Slow Recovery Poses Risk To Nonbank Lenders

If their business borrowers close or have trouble recovering following coronavirus lockdowns, nonbank lenders might have to raise capital. Business development companies (BDCs) that lend to small and medium-sized businesses (SMBs) have quickly grown over the last 10 years and Refinitiv data indicates that total assets of public BDCs have grown almost four times to $83.6 billion as of Q1 2020, The Wall Street Journal reported.

BDCs have engaged in measures to bolster cash as of the start of the coronavirus health crisis. They have cut dividends or upped their credit lines from traditional banks in some cases. Harvest Capital Credit Corp., for example, has moved its strategy to retaining capital from bolstering investments. It has also cut dividends to come.

Lender Golub Capital BDC Inc. recently unveiled a capital raise of $300 million, while FS KKR Capital recently announced a capital raise of $250 million. “We want to use the proceeds to fortify liquidity and to create more flexibility,” Golub Capital Chief Executive David Golub said in a mid-May earnings call per the report.

The health crisis serves as a large test for nonbank lenders that started following the prior downturn and entered parts of commercial lending that are higher risk and traditional banks avoided. In the months ahead, credit losses are forecast to rise, which analysts said underscore the underwriting standards development firms utilized at the time of a formidable economy.

The news comes as chief financial officers (CFOs) are downbeat as the U.S. economy starts coronavirus reopening. Nearly half of the CFOs responding to a quarterly CNBC survey said they see the pandemic having a “negative” impact on their firms this year. And another 39 percent see a “very negative” impact.

The quarterly survey shows increasing certainty among CFOs that the pandemic will negatively impact their companies, while the outlook for the worldwide economy becomes more negative.