NEW YORK–(BUSINESS WIRE)–Kroll Bond Rating Agency (KBRA) releases its Business Development Company (BDC) Ratings Compendium, which analyzes results for the quarter ended September 30, 2021. This edition of the Compendium also includes our BDC Sector Outlook for 2022. KBRA believes that the BDCs in its coverage will continue to exhibit strong credit fundamentals and could absorb the potential fallout from a moderate rising interest rate environment, including wider net interest margins with asset-sensitive (floating rate) balance sheets, and hence the outlook remains stable to positive into 2022.
Themes discussed in the Compendium include:
- Private debt market volumes remained solid during 3Q21; however, high prepayments restricted absolute portfolio growth in some cases.
- KBRA continues to believe that BDCs with strong underwriting practices, a high percentage of first lien senior secured loans in their investment portfolios, moderate leverage, and a greater concentration of loans in the defensive noncyclical sectors should perform better over the long term.
- BDCs continue to take advantage of favorable market conditions, raising senior unsecured debt at record low interest rates and boosting balance sheet quality, which benefits unsecured noteholders through lower asset encumbrance and increasing financial flexibility, as well as improving net interest margins especially in a rising rate environment.
- The sector’s consolidation continues unabated and is expected to benefit from larger scale, including the ability to underwrite larger commitments, obtain greater deal flow, increased portfolio and funding diversity, and operating efficiencies. With large loans underwritten, BDCs are able to better compete with the BSL market.
- KBRA’s Outlook for most rated BDCs remains Stable, although we remain cautiously optimistic in an environment of reduced monetary stimulus, a decline in government support, and moderate inflation and increased interest rates. Additionally, we continue to monitor the potentially negative economic impact from the most recent COVID variant. However, the BDCs fortified their balance sheets during and prior to the pandemic through greater issuance of senior unsecured funding replacing secured debt; deployed capital prudently in mostly defensive portfolio company sectors, with loans higher in the capital structure; and maintained low non-accruals in 2021, which are being facilitated by a benign credit environment heading into 2022.
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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.