Academy GlossaryStructures

What is asset coverage for a BDC?

Asset coverage is a fund’s total assets, less liabilities other than senior securities, divided by its senior securities such as borrowings; a BDC may borrow only if its asset coverage right after is at least 200%, or 150% once approved.

In practice

The Investment Company Act sets the limit. Since a 2018 change, a BDC may move to 150% if its required majority of directors approves, effective one year later, or if shareholders approve, effective the next day. A BDC whose shares are not listed on an exchange must then offer to buy back the stock of shareholders at the approval date, 25% in each of the next four quarters. At 200% a BDC can borrow about $1 per $1 of equity; at 150%, about $2.

An example

Round numbers, not a real fund

Say a BDC has $1 billion of equity and borrows $2 billion. Its assets are $3 billion against $2 billion of debt, an asset coverage of 150%, the lowest the law allows even after approval. Simple example. Terms vary by fund.

Why it matters

It caps how much a BDC can borrow, which drives both the income and the risk its investors take on.

A definition, not advice; where usage varies the entry says so.

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