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BDC Rating Outlook Turns Negative for 2021
October 21, 2020
Source: Fitch Ratings
Asset coverage is expected to be pressured for business development companies (BDCs) heading into 2021, prompting Fitch Ratings to revise its Rating Outlook for the sector to Negative, as detailed in the agency's special report.
Credit performance across BDC portfolios is expected to deteriorate in 2021 given the impact that the coronavirus pandemic will continue to have on the U.S. economy. "Outsized losses could result from an uptick in non-accruals and covenant amendments for distressed borrowers," said Director Chelsea Richardson. "If credit losses rise and valuation volatility returns, asset coverage cushions will be pressured relative to targeted levels."
Fitch currently has Negative Rating Outlooks for five of its 13 rated BDCs. "Maintaining sufficient asset coverage cushions will be critical in order to account for higher losses," said Richardson. While some firms are better positioned, given lower leverage and larger covenant cushions, others could face negative rating momentum should asset coverage cushions fall below Fitch's benchmark ratios.
Fitch's sector outlook for BDCs is worsening for 2021. While asset quality deterioration has been expected for several years, cash earnings will also be negatively affected by lower interest rates, higher non-accrual levels and an increase in paid-in-kind income, which will lead to weaker dividend coverage for some BDCs.
Countering some of the pressures weighing on the sector is solid funding flexibility, as 45.5% of rated BDCs' debt, on average, was unsecured at June 30, 2020. Five rated BDCs took advantage of attractive market conditions to issue $2.5 billion in aggregate unsecured debt in 3Q20 and $4.7 billion has been issued year-to-date. Unsecured debt should continue to represent a meaningful proportion of BDC debt funding in 2021, even if market conditions weaken, as debt maturities are relatively limited next year.
"Fitch Ratings 2021 Outlook: Business Development Companies" is available at 'www.fitchratings.com'.
Contact:
Chelsea Richardson
Director
+1 (212) 612 -7899
Fitch Ratings, Inc.
300 W 57th St.
New York, NY 10019
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