KBRA Releases Research – Third-Quarter 2023 Business Development Company (BDC) Ratings Compendium and 2024 Sector Outlook

KBRA releases its Business Development Company Ratings Compendium, which looks at results for the quarter ended September 30, 2023, as well as provides our 2024 Sector Outlook. The report also examines the growing concerns in the private credit market as expectations for higher-for-longer base rates weigh on the credit quality of investment portfolios and the coming debt maturity wall in 2024 and 2025. The performance of KBRA-rated BDCs remains stable with solid credit metrics, including comfortable liquidity considering near-term maturities, low non-accruals, and appropriate leverage. KBRA’s Outlook for our portfolio of rated BDCs remains generally Stable, reflecting our view that they can successfully manage through a more uncertain environment in 2024.

Key Takeaways

• As BDCs continue to broaden their market share, they continue to go upmarket by underwriting loans 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 higher rates. With the view of higher rates for longer, BDC net investment income (NII) remains solid.
• BDC portfolio growth remains muted to maintain conservative leverage in anticipation of a more stressful economic environment in 2024. However, newly created continuously offered perpetual BDCs raised significant capital in 3Q23 and began investment deployment.
• While credit quality in general remains benign—with KBRA’s rated universe of BDCs having a median non-accrual rate at 0.6% and 1.3% at fair value (FV) and cost, respectively—eight out of our 22 rated BDCs had at least one new portfolio company put on non-accrual in 3Q23. That said, the bulk of portfolio companies were internally rated 1 or 2 (median is 93.4% of portfolios), which indicates companies performing at or above expectations. Still, KBRA remains cautious given an interest rate environment of high or higher-for-longer and a potential recession, which could continue to pressure interest coverage and potentially lead to higher non-accruals in 2024.
• Liquidity remains solid and many BDCs issued unsecured debt in 2023, boosting their financial flexibility should an increase in market volatility ensue, and to get ahead of the coming debt maturities in 2024 and 2025.
• 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.

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