Fitch Ratings has affirmed
The Rating Outlook is Stable.
Today's rating actions have been taken as part of a broader review of business development companies (BDCs) which included 18 publicly rated firms. For more information on the peer review, please refer to 'Fitch Ratings Completes 2023 BDC Peer Review,' available at www.fitchratings.com.
Key Rating Drivers
The ratings affirmation reflects the strength of BCSF's relationship with
Rating constraints specific to BCSF include elevated growth over a relatively short operating history as a business development company, which could yield asset quality issues given the competitive underwriting environment heading into the pandemic and below-average core earnings, which yields weaker interest coverage metrics.
Rating constraints for the BDC sector more broadly include the market impact on leverage, given the need to fair-value the portfolio each quarter, dependence on access to the capital markets to fund portfolio growth, and a limited ability to retain capital due to dividend distribution requirements. Additionally, Fitch believes BDCs will experience weaker asset quality metrics in 2023 amid macroeconomic headwinds and higher debt service burdens and slower growth prospects at portfolio companies.
Fitch views BCSF's affiliation with
At
BCSF's asset quality metrics have been solid historically, with net realized gains averaging 0.0% of the portfolio annually from 2019-2022, which is above the peer average and within Fitch's 'bbb' category benchmark range of -3% to 2%. At
BCSF's core earnings yields have been below the peer group average historically, given its focus on lower-yielding first lien investments. Still, the net investment income (NII) yield, defined as NII as a percentage of the average portfolio at cost, improved to 4.3% in 2022, from 3.7% in 2021 on higher dividend income given growth in the JVs. The NII yield should continue to benefit from growth in the JVs as well as rising rates and wider credit spreads.
BCSF's net leverage target is 1.0x-1.25x, which is generally in line with the peer average. Gross leverage was 1.25x at YE22 (1.14x net of unrestricted cash and foreign currency), down from a peak of 1.86x at 1Q20, which Fitch views favorably. The leverage ratio at YE22 implied a Fitch-calculated asset coverage cushion of 16.7%, which is within Fitch's 'bbb' category leverage benchmark range of 11%-33%.
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Fitch views BCSF's liquidity position as sound. At
The Stable Outlook reflects Fitch's expectations that BCSF's asset coverage cushion will be managed at a level commensurate with the risk profile of the portfolio, the firm will continue to focus on first lien investments, unsecured funding will remain at least 35% of total debt and that BCSF will maintain sufficient liquidity and solid dividend coverage.
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Factors that could, individually or collectively, lead to negative rating action/downgrade include a sustained increase in leverage above the targeted range; deterioration in the portfolio risk profile, such that first lien positions decline materially as a proportion of the overall portfolio; a spike in non-accrual levels; meaningful realized or unrealized losses; a sustained reduction in unsecured debt to below 35% of total debt; weaker cash-based NII coverage of the dividend; or an impairment of the liquidity profile.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Factors that could, individually or collectively, lead to positive rating action/upgrade over time include differentiated credit performance of recent underwriting vintages; demonstrated economic access to unsecured funding through market cycles; maintenance of unsecured debt to total debt above 40%; broader secured funding relationships; a reduction in leverage that is not accompanied by an offsetting increase in the portfolio risk profile; improved core operating consistency; and interest coverage consistently above 4x. Positive rating momentum would also be conditioned on the maintenance of solid dividend coverage and a strong liquidity profile.
DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS
The secured and unsecured debt ratings are equalized with the Long-Term IDR and reflect solid collateral coverage for all classes of debt given that BCSF is subject to a 150% asset coverage limitation.
DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES
The secured and unsecured debt ratings are primarily linked to the long-term IDR and are expected to move in tandem. However, a material reduction in unsecured debt as a proportion of total debt could result in the unsecured debt rating being notched down from the IDR.
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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