KBRA releases its Business Development Company Ratings Compendium, which looks at results for the quarter ended March 31, 2024. In this quarter’s Compendium, KBRA examines the BDC sector’s growing importance in the private credit space with a continuation of robust capital raises, especially among non-traded perpetual BDCs.

Competitive pressures have intensified in tandem with an expanding private credit market through various investment vehicles along with the return of a strong broadly syndicated loan (BSL) market. In addition, we review KBRA-rated BDCs’ 1Q24 results. The performance of KBRA-rated BDCs remained stable in 1Q24 with solid credit metrics, including comfortable liquidity coverage of near-term maturities, low non-accruals, and appropriate leverage. KBRA continues to monitor BDCs’ non-accrual rates and other signs of portfolio stress, as most underlying borrowers only began to experience the full impact of rate hikes in late 2023. KBRA’s Outlook for our portfolio of rated BDCs remains generally Stable, reflecting our view that KBRA-rated BDCs can successfully manage through an uncertain environment with a high proportion of investments composed of senior secured first lien loans, moderate leverage, solid liquidity, and low non-accruals.

Key Takeaways

• Capital inflows to perpetual non-traded BDCs continue at a robust pace with the top 10 raising close to $8 billion of equity in 1Q24.
• Spreads have compressed due to increased competition with a dearth of deal flow and an abundance of dry powder.
• Generally, leverage remains remarkably low due to low deal flow and limited investment opportunities as the sector continues to be cautious in its originations by maintaining high credit quality standards in transactions focused primarily on less cyclical businesses in the upper middle market.
• Although non-accruals remain low as a percentage of total investments, many BDCs added a few portfolio companies to non-accrual status during the quarter. Non-accruals have been more idiosyncratic in nature. While health care companies in the service subsector have been weak, KBRA-rated BDCs maintain low exposure to this area and have highly diverse portfolios by sector and portfolio company.
• As spreads tightened and rates stabilized, BDCs issued a solid amount of unsecured senior debt to get ahead of upcoming 2024 maturities to an expanding investor base. KBRA-rated BDCs have issued about $5 billion of senior unsecured debt YTD, improving liquidity, increasing financial flexibility, and providing greater asset unencumbrance for the benefit of unsecured noteholders.
• While there is a reasonable amount of debt maturing in 2025, we believe KBRA-rated BDCs have sufficient liquidity to provide for these maturities. For KBRA-rated BDCs, liquidity is generally solid and bank relationships are strong with sufficient bank revolver capacity available if needed.
• In a recent research report, KBRA took a deep dive into valuation practices among BDCs (see Private Credit: BDC Portfolio Valuations Are Rigorous). KBRA’s in-depth report was in response to media reports questioning the validity of BDC portfolio valuations.

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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