BDC Fact #4

If you’ve ever watched “Finding Nemo“, you’ll recall the shark scene where Bruce runs a 12 step program with two shark friends, Anchor and Chum. Each shark is to bring another fish to the session, where they repeat the mantra “Fish are friends, not food.” Bruce escorts both Dory and Marlin to the sub wreck for the “party”. All goes swell until Bruce gets a whiff of blood from Dory’s banged nose. Then he reverts to attack mode.

As Bruce is in hot pursuit (“I’m having fish tonight“) and quoting Jack Nicholson from One Flew Over the Cuckoo’s Nest, his shark pals call for an intervention, shouting out: “Remember! Fish are friends not food!!”

I think of Bruce when I think of BDC’s subordinated debt group.

The folklore is that BDC’s lending division serves small companies that are otherwise unable to raise funds elsewhere, and that the average BDC loan is about $285,000. All true. With 27,000 customers, averages can be a bit deceiving (see our post “BDC Fact #3“, December 4-07 regarding the great things they are doing to help promote Canada’s venture capital industry).

You may not have known that there appears to be a strategy within the BDC subordinated debt group in particular to provide larger financing rounds per individual transaction (data from industry sources and publicly available information). The term loan bunch are also stretching to close $10 million deals (no syndication), but that information can only come from anecdotal sources; analysis is impossible. But for the sub debt group, there’s almost a decade of data to sift through.

The deal sizes refer to authorized loans (greater than or equal to $500k), rather than drawdowns:

1999 – 2001:
o BDC led an average of $33.9 million/year of sub debt transactions (this category would include mezzanine and venture debt transactions, so I will call them “sub debt” deals for the purposes of this analysis);
o An average of 40 lead transactions per year;
o An average of 3.6% of deals were $2 million or larger in size; and
o BDC syndicated an average of 3.6% of lead transactions with other parties.

2002 – 2005:
o BDC led an average of $64.3 million/year of sub debt, an increase of 89.7% over the prior period;
o An average of 48 lead transactions per year, a 20% increase;
o An average of 22% of these deals were $2 million or larger in size, an increase of 444% over the prior period; and
o BDC syndicated an average of 5.3% of lead transactions with other parties.

2006 – present:
o BDC led an average of $187.3 million/year of sub debt, an increase of 191% over the prior period;
o An average of 100 lead transactions per year, more than double the 2002-05 period;
o An average of 29.5% of deals were $2 million or larger in size, an increase of 50.4% over the prior period; and
o BDC syndicated an average of 1.9% of lead transactions with other parties, a drop of 64% over the prior period.

Tell me something. Do you sense a trend here?

A few years at an average of $33MM/year. Double that for a few years to $64MM. Triple that last figure to $187MM. What happens in 2009? Quadruple the $187MM annual figure to $750MM/year?

It may well be that Canada’s mezzanine, venture and sub debt market is scaling in a remarkable way. From the data, it appears to be growing in a lumpy fashion, but not that fast. Of the $385 million of sub, venture and mezzanine debt authorized so far in 2007, BDC has announced that they have authorized 51% of that industry-wide sum; their highest percentage marketshare over the nine year period where data is available from public and industry sources.

Holy smokes. More lead BDC sub debt deals. More large (for them) lead deals. Fewer syndications with other providers than ever.

Where’s the private sector? Sleeping at the switch, or being crowded out by the pricing power and structuring flexibility of the federal government’s balance sheet?

MRM