BDCs Gaining Ground as Regulations Bedevil Banks

The slow growth environment is making this a good time to be a lender. And business development companies are in a sweet spot because banks are held back by regulations.

The slow growth, low interest rate environment is making this a good time to be a lender. And business development companies (BDC) are in a sweet spot because banks are being held back by regulations, said Michael Forman, CEO of FS Investments (FSIC) . 'With all the regulatory changes, banks are less inclined to lend to non-investment grade middle market companies,' said Forman. 'With Dodd-Frank and the Volcker Rule, banks are much more conservative and the regulators are more aggressive, so it creates a real opening for BDCs to fill that void that the banks used to dominate.' Forman added that there are nearly 50 percent less banks than there were a decade ago, which is creating a huge amount of opportunity for BDCs. Loans typically range from $200 to $500 million to American companies, and unlike PE firms or banks investors can see every loan on the FS balance sheet and are all publicly filed with the SEC. And if the Federal Reserve raises rates this fall, Forman does not believe it will be a sustained increase. 'Our loans are all floating rate, so the rate will go up with interest rates,' said Forman. 'But we are prepared to be defensive, we think that the Fed will raise interest rates modestly but we are in a lower for longer period.'