Fitch Ratings has affirmed
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
On
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
Unsecured debt accounted for 46.2% of GBDC's total debt at
GBDC's leverage would decline to 1.10x, pro forma for the merger with GBDC 3 (from 1.23x at
GBDC's ratings continue to reflect its first lien focus, strong credit track record, access to investment resources from
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.
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