KBRA Releases Research – First-Quarter 2023 Business Development Company (BDC) Ratings Compendium

KBRA releases its Business Development Company Ratings Compendium, which looks at results for the quarter ended March 31, 2023, 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 benefit from increasing rates, and many have increased their base dividends during the quarter in anticipation of continued solid net interest income (NII) going forward.
• Direct lenders continue to take market share from other lenders, which has resulted in going upmarket in terms of underwriting loans to larger portfolio companies with EBITDAs well in excess of $100 million that may better withstand a recession, with more attractive pricing, higher original issue discount (OID) and, in some cases, tighter covenants.
• BDC portfolio growth remains muted in order to maintain conservative leverage in anticipation of a more stressful economic environment in 2H23.
• Continuously offered perpetual non-traded BDCs ramp up with more robust capital raising in 1Q23 compared to 4Q22.
• Credit quality remains stable with minimal increases in non-accruals. However, internal risk ratings have worsened somewhat with lower interest coverage ratios―in many cases below 2x with an uptick in interest rates.
• Bank sources of funding remain appropriate, as BDCs rely on this source given the difficulty accessing public markets.
• Liquidity remains solid 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.

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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