KBRA releases its Business Development Company (BDC) Ratings Compendium, which analyzes the impact on the sector from rising interest rates and a decelerating economic growth, as well as results for the quarter ended December 31, 2021. KBRA believes that despite these headwinds, the BDCs in its coverage will continue to exhibit solid credit fundamentals and could absorb the potential fallout from rising interest rates, including wider net interest margins with asset-sensitive (floating rate) balance sheets, and potentially higher non-accruals.

Themes discussed in the Compendium include:

• Interest rate normalization is likely a positive tailwind to net interest income (NII) if interest rates ultimately revert to pre-pandemic levels. Rising interest rates should lift NII in a more meaningful way after exceeding 200-bp increases, given the high percentage of loans with interest rate floors of approximately 100 bps for the sector.
• If the Federal Reserve is forced to move more aggressively and interest rates and credit spreads rise well beyond pre-pandemic levels, then non-accruing loans could increase materially, and fair market values could be adversely affected having more adverse consequences for the most economically sensitive portfolio companies. The sector is well positioned for greater economic and geopolitical uncertainty given solid credit metrics, funding, and leverage.
• BDCs have very limited to no direct exposure to the Ukrainian-Russian situation given their U.S. focus. That said, we continue to monitor for any secondary effects including any possible impacts on loan portfolio companies from commodity prices, supply chain issues, etc. Given our rated BDCs’ focus on more economically resilient sectors, negative effects from this situation as well as the inflationary environment are currently expected to be manageable.
• KBRA’s Outlook for most rated BDCs remains Stable, although we remain cautiously optimistic despite an environment of reduced monetary stimulus, a decline in government support, moderate inflation, and increased interest rates. Additionally, we continue to monitor the potentially negative economic impact from rising interest rates, tighter monetary policy, and the current geopolitical risks from the Russian-Ukraine conflict. However, BDCs fortified their balance sheets during and prior to the pandemic through greater issuance of senior unsecured funding that replaced secured debt; deployed capital prudently, with loans higher in the capital structure, in mostly defensive portfolio company sectors that are asset-lite; and kicked off 2022 with low non-accruals, which are being facilitated by strong systemwide market liquidity.

Click here to view the report.

About KBRA

KBRA is a full-service credit rating agency registered in the U.S., the EU, and the UK, and is designated to provide structured finance ratings in Canada. KBRA’s ratings can be used by investors for regulatory capital purposes in multiple jurisdictions.

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