Legislation that would let business development companies increase their allowable leverage has been included in the $1.3 trillion US government-spending bill signed into law by President Donald Trump.
Existing statutes let BDCs borrow at a limit of a 1:1 debt-to-equity ratio. The new provision increases that ratio to 2:1. Both the House of Representatives and Senate had passed similar legislation before, though they were part of different legislative packages.
Ratings agency Fitch Ratings said on Monday that the change will not involve sector-wide alterations to an individual manager’s credit ratings, but any move by a BDC to up its leverage would be viewed as “negative for its ratings”. The firm’s portfolio would also be taken into account, with more exposure to senior investments viewed more favorably.
BDCs are governed by the 1940 Investment Company Act, which was amended in 1980 to allow for the creation of the vehicles. The Small Business Investor Alliance (SBIA), which advocated for the legislation, has said the previous statutes were out of date and needed streamlining.
The SBIA maintains the law change creates a modern framework of regulation for BDCs that it said is consistent with other operating companies. It will simplify offering processes and update proxy rules, in addition to the increased leverage available to BDCs.
The law was agreed last week by Trump and senior members of Congress following negotiations over military spending, healthcare funding and the president’s promised border wall project. Failure to pass the bill and get Trump’s signature would have resulted in a fresh federal government shutdown.