KBRA releases its Business Development Company Ratings Compendium, which looks at results for the quarter ended June 30, 2023, and offers a review of perpetual continuously offered non-traded BDCs as well as recent industry developments. KBRA believes that despite recent headwinds, including a potential recession and asset quality uncertainty, the BDCs in its coverage universe remain stable with few near-term maturities and solid credit metrics, including comfortable liquidity, low non-accruals, and appropriate leverage.

Key Takeaways

• BDCs continue to gain market share at the expense of banks and the broadly syndicated markets—a trend that has dominated for several years, boosted by the creation of perpetual continuously offered non-traded BDCs and the expansion into global wealth channels (accredited investors).
• BDCs account for less than 20% of the total global direct lending market and have the capacity to continue increasing share.
• As BDCs continue to broaden their market share, they have underwritten loans upmarket to include portfolio companies with EBITDA in excess of $100 million. These loans may better withstand a recession, and private credit overall has achieved more attractive pricing, higher original issue discount (OID), and, in some cases, tighter covenants.
• BDCs continue to benefit from increasing rates. With the view of higher rates for longer, BDC net investment income (NII) should remain solid.
• BDC portfolio growth remains muted to maintain conservative leverage in anticipation of a more stressful economic environment in 2H23.
• While credit quality remains stable with minimal increases in non-accruals, an interest rate environment of higher for longer and a potential recession could continue to pressure interest coverage, with potentially higher non-accruals in the back half of 2023 and into 2024.
• Bank sources of funding remain appropriate, as BDCs rely on this source given the difficulty in accessing public markets.
• Liquidity remains comfortable with few debt maturities due prior to 2025.
• KBRA-rated BDCs’ balance sheets remain solid with modest leverage, high percentage of first lien senior secured loans to less cyclical industries, and low non-accruals.

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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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