Fitch Ratings has affirmed Golub Capital BDC, Inc.'s (GBDC) Long-Term Issuer Default Rating (IDR), senior secured debt, and senior unsecured debt ratings at 'BBB'.

The ratings have been removed from Rating Watch Negative. The Rating Outlook is Stable. Fitch has also assigned an expected rating of 'BBB(EXP)' to the proposed $600 million unsecured debt issuance by GBDC.

On Jan. 29, 2024, GBDC priced an issuance of $600 million 6.00% senior unsecured notes due July 2029. Fitch does not expect the issuance to have a material impact on GBDC's leverage as the proceeds will be used to pay down outstanding borrowings.

Key Rating Drivers

The removal of the Negative Rating Watch and ratings affirmation reflects GBDC's continued access to the unsecured debt markets and Fitch's expectation that following the $600 million issuance, unsecured debt will remain greater than 40% of total debt outstanding, pro forma for the merger with Golub Capital BDC, Inc. 3 (GBDC 3), which is expected to close during 2Q24.

Unsecured debt accounted for 46.2% of GBDC's total debt at Sept. 30, 2023, which was within Fitch's 'bbb' category benchmark range of 35%-100% for business development companies (BDCs). Based on debt balances at Sept. 30, 2023 for GBDC and GBDC 3, and adjusting for GBDC's unsecured debt issuances post-quarter end and the upcoming April 2024 notes maturity, Fitch estimates unsecured debt would decline to 45.7% of total debt, pro forma. While the unsecured funding mix could tick down further if GBDC draws on secured credit facilities to fund new investments prior to completing additional unsecured debt issuances, Fitch expects GBDC to manage leverage at 1.15x or below over the near term to ensure unsecured debt remains above 40% of total debt.

GBDC's leverage would decline to 1.10x, pro forma for the merger with GBDC 3 (from 1.23x at Sept. 30, 2023). Secured debt as a percent of total assets would decline to 28.1% from 29.4%, pro forma for the merger, improving unencumbered asset coverage of unsecured debt.

GBDC's ratings continue to reflect its first lien focus, strong credit track record, access to investment resources from Golub Capital LLC, experienced management, appropriate asset coverage cushion, solid funding profile and demonstrated access to the unsecured debt markets, and solid liquidity. Rating constraints include GBDC's growing exposure to recurring revenue loans, which Fitch believes could experience weaker performance as growth at these portfolio companies slows, and below-average proportion of unsecured funding compared to other 'BBB' rated BDCs.

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 2024 amid the continuation of elevated interest rates and slower growth at portfolio companies.

The Stable Outlook reflects Fitch's expectations for the maintenance of unsecured debt above 40% of total debt, leverage at-or-below 1.15x until additional unsecured issuances are completed, a continued focus on first-lien debt investments, the absence of material realized credit losses, and the maintenance of sufficient liquidity and an appropriate asset coverage cushion relative to regulatory and covenant requirements.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

Negative rating momentum could be driven by a reduction in the unsecured funding mix below 40%; continued variability in management's financial policies; deterioration of the portfolio risk profile, such that first-lien positions declined materially as a proportion of the overall portfolio, without a commensurate decline in leverage; a sustained meaningful increase in non-accrual levels; meaningful realized losses; weaker cash earnings dividend coverage; or an impairment in the firm's liquidity profile.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Very strong and differentiated asset quality performance of recent vintages, which will be evaluated in combination with the stability and consistency of GBDC's operating performance, asset quality, valuation, and underlying portfolio metrics, including leverage and interest coverage could provide positive rating momentum. A sustained increase in unsecured debt to at least 50% of total debt, the maintenance of leverage within the targeted range, the maintenance of ample liquidity, solid cash earnings dividend coverage and consistent core operating performance would also be necessary to yield further positive rating action.

DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS

The 'BBB(EXP)' rating assigned to the new unsecured notes is equalized with the long-term IDR and with the rating of the existing unsecured notes as the notes will rank equally in the capital structure. The alignment of the secured and unsecured debt ratings with the Long-Term IDR reflects Fitch's expectations for solid collateral coverage for all classes of debt since GBDC is subject to a 150% asset coverage requirement and has a meaningful unsecured funding component.

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.

ADJUSTMENTS

The Standalone Credit Profile has been assigned above the implied Standalone Credit Profile due to the following adjustment reasons: Business Profile (positive), Management & Strategy (positive).

The Earnings & Profitability score has been assigned above the implied score due to the following adjustment reason: Portfolio risk (positive).

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

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

(C) 2024 Electronic News Publishing, source ENP Newswire