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Legal Update

Small Business Credit Availability Act Approved by US Congress, Increases Permissible BDC Leverage

23 March 2018
Mayer Brown Legal Update

President Trump has signed the Consolidated Appropriations Act of 2018 (also known as the “omnibus spending package”), which was passed by the House yesterday and the Senate earlier today and includes H.R. 4267, the Small Business Credit Availability Act. H.R. 4267 would potentially increase the amount of permissible leverage that can be employed by a business development company (BDC).

US House Financial Services Committee (HFSC) Chairman Jeb Hensarling (R-TX), noting that the HFSC has marked up this bill in the last three congressional sessions, has said of H.R. 4267 and H.R. 4792, the Small Business Access to Capital After a Natural Disaster Act, which the HFSC also passed on a bipartisan basis:

“Both of these bills are important, pro-growth, bipartisan pieces of legislation that will help our small businesses access the capital they need to expand and create jobs,” and “[t]hey are just two of the nearly three dozen strong bipartisan bills our committee has advanced this congress and that we hope our Senate colleagues will give the same consideration.”

Under section 2(a)(2) of the Small Business Credit Availability Act, the required minimum asset coverage requirement that must be met by a BDC can decrease from 200 percent to 150 percent if:

“(A) not later than 5 business days after the date on which those asset coverage requirements are approved under subparagraph (D) of this paragraph, the business development company discloses that the requirements were approved, and the effective date of the approval,
in—

“(i) any filing submitted to the Commission under section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a); 78o(d)); and

“(ii) a notice on the website of the business development company;

“(B) the business development company discloses, in each periodic filing required under section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a))—

“(i) the aggregate outstanding principal amount or liquidation preference, as applicable, of the senior securities issued by the business development company and the asset coverage percentage as of the date of the business development company’s most recent financial statements included in that filing;

“(ii) that the business development company, under subparagraph (D), has approved the asset coverage requirements under this paragraph; and

“(iii) the effective date of the approval described in clause (ii);

“(C) with respect to a business development company that is an issuer of common equity securities, each periodic filing of the company required under section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a)) includes disclosures that are reasonably designed to ensure that shareholders are informed of—

“(i) the amount of senior securities (and the associated asset coverage ratios) of the company, determined as of the date of the most recent financial statements of the company included in that filing; and

“(ii) the principal risk factors associated with the senior securities described in clause (i), to the extent that risk is incurred by the company; and

“(D) the company—

“(i)(I) through a vote of the required majority (as defined in section 57(o)), approves the application of this paragraph to the company, to become effective on the date that is 1 year after the date of the approval; or

“(II) obtains, at a special or annual meeting of shareholders or partners at which a quorum is present, the approval of more than 50 percent of the votes cast for the application of this paragraph to the company, to become effective on the first day after the date of the approval; and

“(ii) if the company is not an issuer of common equity securities that are listed on a national securities exchange, extends, to each person that is a shareholder as of the date of an approval described in subclause (I) or (II) of clause (i), as applicable, the opportunity (which may include a tender offer) to sell the securities held by that shareholder as of that applicable approval date, with 25 percent of those securities to be repurchased in each of the 4 calendar quarters following the calendar quarter in which that applicable approval date takes place."

(Corrected to conform to the final enrolled bill and for text omitted in error.)

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