KBRA releases its Business Development Company (BDC) Ratings Compendium, which looks at the sector’s liquidity, as well as results for the quarter ended June 30, 2022. KBRA believes that despite recent headwinds and a potential recession, the BDCs in its coverage will continue to exhibit solid credit fundamentals.

Themes discussed in the Compendium include:

• BDC liquidity generally remains solid, boosted by an abundance of unsecured debt issuances in 2021; the extension of debt maturities to five or more years, nominal short-term unsecured debt maturities (within two years), which limits near-term refinancing risk; and adequate committed secured bank lines and cash to cover short-term unsecured debt maturities.
• The issuance of unsecured debt provides BDCs with greater financial flexibility, and it benefits unsecured noteholders with a greater amount of unencumbered assets.
• Portfolio growth was muted, as many of the BDCs have reached their conservative target leverage ratios of 0.9x to 1.25x, and repayments were low due to inactivity in mergers and acquisitions (M&A) and IPOs. However, to capture the private credit loan demand with banks sitting on the sidelines, there has been a plethora of newly created BDCs operating under the same credit platform with Securities and Exchange Commission (SEC) co-investment relief.
• The sector took negative marks to its investments primarily due to credit spread widening in the second quarter, which negatively impacted NAVs.
• Credit quality remains stable with very few additional non-accruals in 2Q22, and non-accruals as a percentage of total investments at fair value remain low, reflecting a multiyear benign credit environment. While we do not anticipate materially elevated non-accruals in the near term, we see moderate risk for an uptick in non-accruals in the next six to 18 months with a potential recession looming. However, KBRA believes its universe of rated BDCs is well positioned from a loss standpoint and has capacity to absorb moderate increases in non-accruals with credit losses.
• Net interest income (NII) is expected to increase more substantially in 3Q22, as interest rates have risen more meaningfully through the loan floors, and the increase is expected to more than offset the decline in prepayment fees from a slowdown in IPO and M&A activities. Hence, many BDCs announced dividend increases during the quarter.
• Our outlook for the sector remains stable.

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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