Once licensed, an SBIC receives a commitment from the SBA to provide a specific amount of leverage over the course of several years. When the fund is ready to make an investment, it draws down on that commitment by issuing a “debenture,” a debt security that entitles its holder to receive a schedule of interest and principal payments over a certain period of time. Whether a fund has been licensed as a regular SBIC or an Impact Investment SBIC, it can issue two types of debentures:
The Standard Debenture:
The most common financing option SBICs use is simply called the “standard” debenture. These securities are structured as follows:
|Amount:||Standard debentures are generally available in an amount equal to or less than two times the amount of private capital committed to the fund. For some SBIC licensees that have successfully managed more than one fund in the program, the SBA may allow them to access debentures in an amount equal to or less than three times the amount of private capital committed to their fund. In either instance, SBICs have access to a maximum of $150 million for a single fund and $225 million for multiple funds under common control.|
|Term:||The standard debenture has a term of ten years, but can be prepaid by the SBIC licensee without penalty. However, prepayments must be made in full and on scheduled, semi-annual payment dates.|
Standard debentures are non-amortizing debt securities with interest payments made on a semi-annual basis. The interest rate of the debenture is fixed within six months of issuance at a premium over the 10-year U.S. Treasury Note.
|Fees:||The SBIC pays a commitment fee of 1% up front, a 2% draw down fee at issuance and a variable Annual Charge of around 1% paid semi-annually.|
|Use of Proceeds:||The proceeds from the issuance of a standard debenture must be used exclusively for investments in “small businesses,” as defined by the SBA’s Office of Size Standards and federal regulations. Real estate, project finance and investments in “passive” entities are generally prohibited.|
Discounted Debentures: LMI and Energy Savings Investments
The second type of debenture SBICs are able to issue are called “discounted” debentures. These are debt securities with payment schedules that differ substantially from the standard debenture and whose proceeds may be used only for investments in specific types of small businesses:
|Amount:||Discounted debentures may have the same face value amounts as standard debentures, but are they issued at a discount. Over a period of 5 years, the debentures gradually accrete to face value.|
|Term:||Discounted debentures can be issued with maturities of five or ten years, with no penalties for prepayment. Prepayments must be made in full, on semi-annual payment dates and not before the end of a one-year "lockout" period.|
There are no interest payments on discounted debentures with maturities of five years.
For discounted debentures issued with maturities of ten years, interest is due on a semi-annual basis during the last five years of the term only. The interest rate is fixed within six months of issuance of the note.
|Fees:||SBICs issuing discounted debentures are subject to the same fee schedule as regular debentures.|
|Use of Proceeds:||
The proceeds from issuance of discounted debentures are exclusively for investments in small businesses located in “low-to-moderate income areas” or those businesses involved in “qualifying energy-savings activities.” Both of these criteria have regulatory definitions available (Energy-Savings, LMI)
For more information on the LMI and Energy-Savings Debentures, visit the SBIC Licensee section of our website.
Fees & Other Costs:
The following chart outlines all the costs of participating in the SBIC Program from the application process through licensing and surrender.
|Licensing Application Fee||$10,000 due when filing a Licensing Application. An additional $5,000 is due for licensees structured as limited partnerships. No fee is due when filing a Management Asssessment Questionnaire.|
|Committment Fee||1% of commitment payable at the time of issuance|
|Draw Fee||2% of leverage drawn; withheld from the proceeds of the draw|
|Underwriter's Fee||0.375% of leverage drawn; withheld from the proceeds of the draw (Only for Standard Debentures)|
|Selling Agent Fee||0.05% of leverage drawn; withheld from the proceeds of the draw (Only for Standard Debentures)|
|Annual Charge||1.38% or Less; established each year and payable according to the same terms and conditions as the interest due on debentures. Refer to the SBIC Licensee section of our site for a historical table of Annual Charge rates.|
|Interim Financing: Interest Rate||LIBOR+30; payable during the interim financing period for leverage drawn in between pooling dates (Only for Standard Debentures)|
|Trust Certificate Interest Rate||Rate on 10-Year Treasury + Premium; rate is fixed at the time of each debenture pooling. Payable semi-annually. The SBIC Licensee section of our website contains an historical table of Trust Certificate Rates|
|Exam Fee||Each licensee is subject to exam fees determined according to the table included in 13 CFR 107.692. Fees are payable at the time of each biennial exam.|