KBRA Releases Research – Fourth-Quarter 2023 Business Development Company (BDC) Ratings Compendium
March 28 2024 - 2:21PM
Business Wire
KBRA releases its Business Development Company Ratings
Compendium, which looks at results for the quarter ended December
31, 2023, and offers a review of perpetual continuously offered
non-traded BDCs as well as recent industry developments. In this
quarter’s Compendium, KBRA examines the BDC sector’s funding
sources, highlighting that the use of traditional bank revolving
credit facilities continues to decline due to constraints on bank
balance sheets and the pending Basel 3 Endgame proposal.
The performance of KBRA-rated BDCs remained stable in 4Q23 with
solid credit metrics, including comfortable liquidity considering
near-term maturities, low non-accruals, and appropriate leverage
overall. KBRA will be monitoring BDC’s non-accrual rates and other
signs of portfolio stress, as most underlying borrowers only began
to experience the full impact of rate hikes in late 2023. KBRA’s
Outlook for our portfolio of rated BDCs remains generally Stable,
reflecting our view that KBRA-rated BDCs can successfully manage
through a more uncertain environment in 2024.
Key Takeaways
- As BDCs continue to increase their market share in direct
lending, they continue to diversify and broaden their funding mixes
away from traditional revolving bank credit facilities, tapping the
senior unsecured debt markets, issuing collateralized loan
obligations (CLO), and establishing special-purpose vehicle (SPV)
asset facilities.
- BDC net investment income (NII) continues to benefit from
higher rates; however, we are cautious as fixed rate debt raised in
2020 and 2021 matures and becomes refinanced at higher rates. In
addition, with the Federal Reserve’s expectation of reducing base
rates in 2024, BDCs may experience margin pressure.
- For 2023, the majority of KBRA-rated BDCs had negative net
fundings, reflecting low mergers and acquisitions (M&A)
activity and buyout transaction volumes coupled with the sector’s
prudent leverage metrics. Growth was targeted toward perpetual-life
BDCs that raised mostly retail capital and newly formed BDCs that
raised significant institutional capital in 2023.
- While credit quality in general remains benign—with KBRA’s
rated universe of BDCs having a 4Q23 median non-accrual rate of
0.5% and 1% at fair value (FV) and cost, respectively, compared to
0.6% and 1.3% at 3Q23—several BDCs added at least one portfolio
company to non-accruals in 4Q23. KBRA continues to monitor
additional warning signals, and we have not seen material changes
in quarter-over-quarter (QoQ) payment-in-kind (PIK) metrics and
internal ratings, nor are we aware of material increases in
amendments and waivers. That said, KBRA remains cautious given the
high interest rate environment and a potential economic slowdown,
which could continue to pressure interest coverage and lead to a
further increase in non-accruals in 2024.
- Liquidity remains solid, with many BDCs issuing senior
unsecured debt in 4Q23 and 1Q24, anticipating short-term debt
maturities as well as boosting their financial flexibility should
markets become disrupted in the latter half of the year.
- KBRA-rated BDCs’ balance sheets remain solid with modest
leverage, a high percentage of first-lien senior secured loans to
less cyclical industries, and low non-accruals.
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.
Doc ID: 1003728
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Teri Seelig, Managing Director +1 646-731-2386
teri.seelig@kbra.com
Kevin Kent, Director +1 301-960-7045 kevin.kent@kbra.com
Hunter Chadwick, Analyst +1 301-960-7042
hunter.chadwick@kbra.com
Leah Hallfors, Senior Director +1 301-969-3242
leah.hallfors@kbra.com
Joe Scott, Senior Managing Director +1 646-731-2438
joe.scott@kbra.com
Business Development Contact
Constantine Schidlovsky, Senior Director +1 646-731-1338
constantine.schidlovsky@kbra.com