BDCs Use JVs Including Direct Lending Entities, CLOs to Increase Returns; JV Leverage Typically Exceeds BDC Limits; Could Increase Leverage, Sensitivity to Loan Price Moves

Editor’s Note: The below is a reprint of an article originally available to Private Credit & Deal Origination Subscribers covering business development companies’ use of joint ventures and the additional risks as a result of this exposure. Octus’ PCDO team analyzes the entire public and private BDC market as well as a number of interval funds and other private credit vehicles. Octus’ full Private Credit product suite includes deal origination & private credit coverage, BDC and Private Credit Data, Private Credit Fundamentals, Deal Term Analytics and Covenants analysis. Please contact [email protected] or your account manager for a demo.   Credit Research: Michael Soricillo   Key Takeaways   Business development companies, or BDCs, are not required to consolidate financials, including debt of joint ventures, even if the BDC owns the majority of economic interests. Consolidating this debt would meaningfully add leverage by an average of one turn across BDCs analyzed. Leverage at JVs often exceeds BDC limits and averages 3x to 4x as calculated by debt divided by equity.   BDCs have cited reasons behind JVs that include offsetting margin compression, in part by relying on additional leverage allowed at JV entities.   JVs analyzed take on two forms: i) a[...]