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

NEW YORK, December 06, 2024–(BUSINESS WIRE)–KBRA releases its Business Development Company Ratings Compendium, which looks at results for the quarter ended September 30, 2024. This quarter, KBRA reviewed the financial performance of our rated BDCs in a landscape characterized by ongoing competitive pressures, increasing payment-in-kind (PIK) optionality, declining but still high base interest rates, and the potential for distribution/common dividend cuts. We also evaluated asset quality, noting higher unrealized and realized losses for some BDCs despite consistently low non-accrual rates. In 3Q24, the market environment remained characterized by low transaction volumes, significant capital raises by new private credit vehicles, and a strong broadly syndicated loan (BSL) market supported by an active collateralized loan obligation (CLO) market.

For this Compendium, KBRA separated the financial metrics of its continuously offered non-traded perpetual BDCs (eight publicly rated), given their nascent stage and portfolio composition differences. These BDCs have unseasoned portfolios with minimal or no non-accruals (median 0% at fair value (FV)), a significant proportion of first lien senior secured loans (median about 96%), and a reasonable allocation to more liquid assets, including BSLs with lower yields. They also exhibit relatively low gross leverage, with a median of 0.83x.

KBRA-rated BDCs generally demonstrated stable performance in 3Q24, and KBRA maintains an overall Stable Outlook for 2025, supported by solid credit metrics. This includes comfortable liquidity coverage for near-term maturities, which have either been refinanced or in some cases proactively prefunded. Liquidity and funding structures have benefited from sizable issuances of senior unsecured debt in a favorable market for unsecured debt in 2024. Further, KBRA-rated BDCs are aided by strong access to bank credit facilities, reflecting considerable overall relationships between major banks and large BDC managers. The ability to proactively tap debt markets and enhance bank funding sources bolsters our view of liquidity heading into 2025. Additionally, BDCs are focused on liability management in the high interest rate environment, enhancing funding sources to include middle market CLOs for increased diversification of secured borrowings and hedging newly issued fixed rate debt in anticipation of lower rates. KBRA believes that the rated BDCs can navigate an uncertain environment effectively, driven by strong investment composition, which includes a high proportion of senior secured first lien loans and moderate leverage. Non-accruals remain manageable with room for an increase in the event of a less favorable economic environment.

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