Fitch Ratings has affirmed Goldman Sachs BDC, Inc.'s (GSBD) Long-Term Issuer Default Rating (IDR), secured debt rating and unsecured debt ratings at 'BBB-'.

The Rating Outlook is Stable.

The 'A' rating and Stable Outlook assigned to The Goldman Sachs Group, Inc. (Goldman Sachs), the parent company of GSBD's external manager, Goldman Sachs Asset Management (GSAM), are unaffected by these actions.

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 rating affirmations reflect GSBD's above-average exposure to first lien investments and low exposure to equity investments, improved funding flexibility and affiliation with Goldman Sachs, which provides access to deal flow and enhanced risk management capabilities.

Rating constraints include GSBD's above-average realized loss rates historically, weakening asset coverage cushion, and higher underlying portfolio leverage compared to peers at Dec. 31, 2022.

Rating constraints for BDCs more broadly include the market impact on leverage, given the need to fair-value the portfolio quarterly, dependence on access to the capital markets to fund growth and a limited ability to retain capital due to distribution requirements. Additionally, Fitch believes BDCs will experience weaker asset quality metrics in 2023 amid higher interest rates and slower growth at portfolio companies.

As of Dec. 31, 2022, GSBD's investments on non-accrual amounted to 0.3% and 2.1% of the total investment portfolio at value and cost, respectively. This was an improvement from a year prior and below the rated peer average. However, GSBD's annual net realized loss rate, as a percentage of the average portfolio at value, averaged 1.0% from 2019-2022, which exceeded the rated peer average, but remains within Fitch's 'bbb' category asset quality benchmark range of negative 3% to 2%. Fitch believes that higher interest rates and a more challenging economic backdrop will lead to increased amendment activity and higher payment-in-kind (PIK) income in coming quarters.

GSBD's core operating performance has been sound, growing steadily with expansion in the portfolio. Net investment income (NII) as a percentage of the average portfolio, at cost, was 6.0% in 2022, which was above the rated peer average, given GSBD's strong portfolio yield which Fitch believes is partially attributable to its participation in higher-yielding recurring revenue loans. Additionally, GSBD has a below-average base management fee rate and voluntarily waived a portion of fees in 2022. Fitch believes NII should continue to benefit from rising interest rates in 2023 given the firm has a meaningful fixed-rate funding component but potential credit deterioration will remain a headwind.

Leverage, as measured by par debt to equity, was 1.35x at Dec. 31, 2022, or 1.32x net of cash, which was above the company's targeted net leverage ratio of 1.25x and above the rated peer average. GSBD's leverage implied an asset coverage cushion of 14.0% at YE 2022, which is at the low-end of Fitch's 'bbb' category capitalization and leverage benchmark range of 11%-33%. In March 2023, GSBD conducted an equity issuance and used net proceeds to repay a portion of their outstanding debt under their revolving credit facility.

Pro forma for the equity issuance, GSBD's estimated leverage dropped to 1.20x. While the company's higher leverage is partially mitigated by an increased focus on first lien investments (89.3% at YE 2022), failure to maintain leverage within the firm's targeted range could result in negative rating action.

At Dec. 31, 2022, unsecured debt accounted for 42.9% of GSBD's total debt, which was within Fitch's 'bbb' category funding, liquidity and coverage benchmark range for BDCs of 35%-50%. Fitch expects GSBD to maintain unsecured debt of at least 35% of total debt.

GSBD's liquidity position is sound, with $39.6 million of cash and $548.7 million of availability on the secured revolving facility, subject to borrowing base requirements, at Dec. 31, 2022. Cash flows from investment repayments and exits were down significantly in 2022 from record levels in 2021, but represented 16.4% of the beginning portfolio, at value.

NII coverage of the dividend has been solid, averaging 108.1% from 2019-2022, and amounting to 116.7% in 2022. PIK income represented 6.3% of interest and dividend income in 2022, which was below the peer average but marginally higher than 5.3% in 2021. Fitch would view a meaningful increase in PIK income, without a demonstrated ability to collect accrued PIK in cash, negatively.

Rating Sensitivities

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Failure to reduce leverage to the targeted range could result in negative rating action. Additionally, a decline in the asset coverage cushion to below 11%; deterioration of the portfolio risk profile, such that first lien positions declined materially as a proportion of the overall portfolio, or if a shift in focus toward subordinated debt and/or equity investments occurred without a commensurate decline in leverage; a spike in non-accrual levels; meaningful realized or unrealized losses; and an inability to improve cash-based NII coverage of the dividend or a decline in unsecured debt below 35% of total debt could also yield negative rating momentum.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Strong and differentiated credit performance of recent vintages, evaluated in combination with the consistency of GSBD's operating performance, asset quality metrics, investment valuations and underlying portfolio metrics and/or a sustained reduction in leverage which is not accompanied by an offsetting increase in the risk profile of the portfolio would be positive for ratings. Positive rating momentum would also be contingent upon the maintenance of unsecured debt of at least 40% of total debt, ample liquidity, consistent core operating performance and an improvement in cash earnings coverage of the dividend.

DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS

The equalization of the secured and unsecured debt ratings with the Long-Term IDR reflects solid collateral coverage for all classes of debt given that GSBD is subject to a 150% asset coverage limitation. The unsecured debt rating also reflects Fitch's expectation that unsecured debt, as a proportion of GSBD's total funding, will remain within the 'bbb' category range.

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 sustained 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 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

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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