|[March 30, 2023]
KBRA Releases Research - Fourth-Quarter 2022 Business Development Company (BDC) Ratings Compendium
KBRA releases its Business Development Company Ratings Compendium, which looks at results for the quarter and year ended December 31, 2022, 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.
Portfolio companies are experiencing a combination of rising interest rates, slowing revenue growth, and higher operating costs, which is negatively impacting their interest coverage ratios.
From a net interest income (NII) perspective, BDCs continue to benefit from rising interest rates due to their variable rate investments and a significant portion of fixed-rate debt.
Non-accruals are currently low, with a median of KBRA-rated BDCs of only 0.4%. However, KBRA believes that the impact of a slowing economy and high interest rates will likely result in weakened asset quality in 2H23. We view potential asset quality issues as manageablein the context of strong NII and conservative leverage metrics.
Private credit volume remains subdued as BDCs maintain conservative leverage levels; mergers and acquisitions (M&A) and initial public offering (IPO) activities remain scarce; and continuously offered, perpetual BDC capital raises are slowing considerably. Investors are exercising caution in this less favorable economic backdrop, with an increasing chance of a recession, which is contributing to the muted private credit activity.
Although near-term debt maturities are relatively small and BDC liquidity remains comfortable, a few BDCs with recent debt maturities have chosen to refinance their unsecured debt by drawing on their secured bank facilities. This is because fixed rates remain high, making it economically unattractive to lock in and refinance the debt at current rates.
Secured bank credit facilities remain a crucial source of funding for the industry. However, given recent events, notably bank receiverships and the Fed's goal of tightening credit conditions, we are closely monitoring the potential for reduced credit availability to the sector.
Click here to view the report.
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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