Fitch Ratings has affirmed
The Rating Outlook is Stable.
The 'A' rating and Stable Outlook assigned to
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
Rating constraints include GSBD's above-average realized loss rates historically, weakening asset coverage cushion, and higher underlying portfolio leverage compared to peers at
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
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
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
GSBD's liquidity position is sound, with
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 '
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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