KBRA Releases Research – Business Development Company (BDC) Ratings Compendium: The Impact of Higher Rates and a Potential Recession

KBRA releases its Business Development Company (BDC) Ratings Compendium, which analyzes the impact on the sector from rising interest rates and a potential recession, as well as results for the quarter ended March 31, 2022. KBRA believes that despite these headwinds, the BDCs in its coverage will continue to exhibit solid credit fundamentals.

Themes discussed in the Compendium include:

• KBRA continues to monitor BDCs for declining portfolio quality from rising commodity prices, supply chain issues, and rising wages. Since our rated BDCs focus on more economically resilient sectors, negative effects from this inflationary environment are currently expected to be manageable, at least in the short run.
• The benefit of rising interest rates to BDCs’ earnings, due to the sector’s asset-sensitive balance sheets, should flow through earnings more meaningfully in the latter half of the year as rates rise above existing floors.
• Credit quality remains solid with low non-accrual rates on both a cost and fair value basis. Despite rising interest rates, BDCs continue to benefit from strategically positioning investment portfolios prior to the pandemic in noncyclical asset-lite portfolio companies with positive cash flow, solid management, and strong interest coverage. Also, BDCs remain focused on loans higher in the capital structure with better documentation, which could help offset possible credit deterioration in a weak economic environment.
• BDCs maintain relatively low leverage, averaging less than 1x for KBRA’s universe of rated BDCs. Fears of bloated balance sheets with high leverage stemming from the 2018 Small Business Credit Availability Act (SBCAA), which reduced a BDC’s required asset coverage to 150% from 200%, have been largely unfounded.
• There were no rating changes within the KBRA-rated BDC universe since our previous compendium from March 2022. KBRA added one new BDC to its rated universe, Barings Capital Investment Corporation (BCIC) (issuer/senior unsecured debt ratings: BBB-/Stable). The Outlook for most KBRA-rated BDCs remains Stable, but we remain cautious in an environment of reduced monetary stimulus, a decline in government support, inflationary pressures, and increased interest rates. KBRA believes the BDCs in its rated universe remain disciplined in their underwriting and will continue to exhibit solid credit fundamentals, with the ability to absorb fallout from a potential recession. Our overall sector outlook 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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