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Venture Debt Firms: Crunch Time and Opportunity

by: Mark McQueen October 12, 2008 | about stocks: BBT / BRK.A / BRK.B / C / DB / GE / GS / HTGC / JPM / RY / TICC / WFC    
Mark McQueen

Mark McQueen

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As governments race to preserve “liquidity” for small, medium and large business at their local banks, what is an information technology, clean tech or alternative energy company to do if they need to raise capital? And what’s become of the subordinated debt market if the senior debt market has shut tight?

The evidence south of the border is that some specialty finance firms are pulling in their horns (see prior post “Barron’s says the credit crunch is now hitting venture debt” Aug 19-08 and Friday’s WSJ article “Silicon Valley Finds It Isn’t Immune From Credit Crisis“). In many cases, this is due to actions at the very same lenders that are allegedly turning off the taps in the credit markets. Not that this all wasn’t foreseeable, as it truly was (see prior post “Next stop: Corporate Subprime?” March 25-07), but it is still a shame for it to actually happen.

Here are a few examples, and the news is mixed:

  • Greenwich-based TICC Capital Corp. (TICC) has seen availability under its own bank line fall from $150 million to $30 million. Between January and October of this year, TICC had to reduce its reliance on its own bank line from $146.5 million to $15 million, which means that TICC lost the ability to put out $131.5 million of capital into the knowledge-based economy in the space of nine months. With $312 million of deals on the books as of June, that’s a huge component of their capital base. To deal with the changes to their bank line, TICC intelligently raised $20.9 million in June from existing shareholders via a rights offering. The Royal Bank of Canada (RY) and BB&T (BBT) are (were) their lenders. TICC’s business remains profitable.
  • San Jose-based Western Technology saw its $125 million line pulled by JPMorgan (JPM) and Deutsche Bank (DB) last month.
  • To supplement a $250 million bank facility utilized by Hercules Technology Growth Capital (HTGC) and obtained from Citigroup (C) and Deutsche Bank the previous year, which was extended to Oct. 30 but not increased, the good people at Wells Fargo Foothill (WFC) came through with a new $50 million line, which they hope to grow to $300 million via the addition of more lenders to the syndicate. As at June 2008, HGTC had about $545 million of loans outstanding. HGTC had a very profitable second quarter, paid a handsome dividend to its shareholders, and the quality of its portfolio was not an issue.
  • Our friends over at MMV Financial turned to another Canadian-based specialty finance firm for an additional C$25 million of capital to lend into their marketplace. ROI Fund’s capital was tacked onto an existing C$75 million facility led by Wells Fargo Foothill.

The impact of changes such as these can be seen immediately in the knowledge-based economy (this from the WSJ last week):

Small businesses are turning to angel investors, suppliers and personal credit cards as the financial crisis spreads to Main Street and access to commercial bank loans becomes more restricted.

Agents and intermediaries are telling us that one thing that hasn’t yet sunk in with would-be borrowers appears to be the simple reality that the “cost of capital” has risen this year. When Goldman Sachs (GS) and General Electric (GE) have to pay 10% interest on their preferreds, and grant 100% warrant coverage, to Berkshire Hathaway (BRK.A) you know times have changed. If you are a small company and can borrow capital to grow your business, don’t expect to be able to borrow for less than AAA-rated GE right now. One hundred percent warrant coverage isn’t necessary, but double-digit coupons likely are.

Banks are charging each other about 5% for 30-day funding; almost double the rate of 12 months ago. In addition, those are local commercial banks!

If you can’t make money on a new initiative or capital expenditure unless you can borrow at 7% - 8%, the project probably wasn’t worth doing anyway. However, if you have a good company with customers who care and you need some more growth capital, please get in contact with us. We have plenty of capital left for C$2 million - C$10 million debt opportunities, and we can lead large deals (C$60 million) with the backing of our syndicate partners.

Disclosure: None

 

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