KBRA Releases Research – Business Development Company (BDC) Ratings Compendium: March 2021 and COVID-19 Update

Kroll Bond Rating Agency (KBRA) releases its Business Development Company (BDC) Ratings Compendium, which analyzes results for the quarter ended March 31, 2021, in addition to the impact of the pandemic on BDCs within the KBRA universe. In this edition of the Compendium, KBRA also examines leverage among the 15 largest BDCs in the three years since the Small Business Credit Availability Act (SBCAA) lowered the asset coverage ratio to 150% from 200%.

Themes discussed in the Compendium include:

• While leverage has increased since the loosening of the BDC leverage regulatory limit, so have BDC investments in first lien senior secured debt, which somewhat offset the increased risk. Further, the median leverage of the top 15 publicly traded BDCs remains below 1.0x as of March 31, 2021.
• BDCs continue to reverse some of their unrealized losses from 1Q20, with continued spread tightening to pre-COVID levels. As BDCs are required to mark to market their portfolios quarterly, they are exposed to earnings volatility.
• The median NAV change from December 31, 2019 until March 31, 2021, for the BDCs under KBRA’s coverage was -2.5%. However, the quarter-over-quarter (QoQ) median NAV increase stood at 1.8%.
• Median non-accruals as a percentage of total investments at fair value continued to decline in 1Q21, to 0.80% from 0.88% in 4Q20, and compare favorably to 1.75% in 2Q20. The BDCs had positioned their portfolios mostly in noncyclical sectors prior to the pandemic, which helped keep non-accruals low and positioned to continue improving as the country reopens.
• The private debt markets remain robust with competitive factors intensifying, which have resulted in the continuation of covenant-lite documents and tighter spreads of pre-pandemic levels; the BDCs under KBRA’s coverage remain cautious, abiding by strict underwriting guidelines.
• KBRA continues to believe that BDCs with strong underwriting practices, a high percentage of first lien senior secured loans in their investment portfolios, and a greater concentration of loans in the defensive noncyclical sectors should perform better over the long term.
• 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.
• While KBRA remains cautious, the COVID-related credit impact on BDCs continues to improve as the economy reopens. In addition, we believe that the shoring up of balance sheets during and prior to the pandemic, increased unsecured funding replacing secured debt in addition to prudent capital deployment in the uncertain environment with increased financial flexibility, should help most BDCs absorb additional non-accruals and write-downs should the economy worsen.

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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