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Moody's Downgrades Outlook of BDCs on Coronavirus Concerns
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Owing to the coronavirus-induced economic crisis, Moody’s Investors Service — the rating services arm of Moody's Corporation (MCO - Free Report) — has downgraded the industry outlook for business development companies (“BDCs”) to negative from stable.
Reason for the Downgrade in Outlook
The rapidly spreading coronavirus along with falling oil prices has resulted in a severe credit shock across most of the sectors and markets. Moody’s believes that the BDC sector will likely be the most affected by the credit shock.
Per Moody’s, the crisis is expected to lead to a deterioration of asset quality, profitability and capital of BDCs. This is the main reason behind Moody’s lowering the outlook for the BDC sector. Moreover, given the implications of the outbreak on public health, Moody's views it as a social risk under its environmental, social and governance (“ESG”) framework.
Notably, Moody’s has also affirmed the ratings of nine individual BDCs, including Goldman Sachs BDC, Inc. (GSBD - Free Report) , Owl Rock Capital Corporation , Ares Capital Corporation (ARCC - Free Report) , BlackRock TCP Capital Corp. (TCPC - Free Report) , FS KKR Capital Corp (FSK - Free Report) , Oaktree Specialty Lending Corporation (OCSL - Free Report) , Prospect Capital Corporation, Solar Capital Ltd. and TPG Specialty Lending, Inc.
Rationale Behind Ratings Affirmation
The virus outbreak, which is expected to lead to an increase in loan non-accruals and defaults, will likely negatively impact earnings and cash flow strength of BDCs, per Moody’s.
Also, the pandemic has resulted in the deterioration in economic outlooks in the United States as well as globally, resulting in declines in commercial activity levels. This has affected the financial profiles of most of the companies, including middle-market businesses within the United States, in which BDCs mainly invest.
Further, per Moody’s, the majority of the sectors will likely witness deterioration in their asset quality if the current operating and economic conditions persist. This will hamper the operating performance and capital strength of BDCs.
However, most of the BDCs that are rated by Moody's have modest exposure to the sectors that are among the hardest hit initially by the pandemic, including travel and leisure, hospitality, gaming, retail, restaurant, and energy, which is a positive.
Also, Moody's rated BDCs have strong liquidity positions, which will result in lower debt repayment risks over the next 1-2 years, with little debt maturing until 2022. In fact, most rated BDCs have sufficient liquidity to fund the immediate draw against commitments by their borrowers.
Thus, despite the expectation of deteriorating asset quality, the ratings of the above-mentioned BDCs have been affirmed by Moody’s, given their strong liquidity positions, adequate capital cushions and conservative investment portfolios.
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Moody's Downgrades Outlook of BDCs on Coronavirus Concerns
Owing to the coronavirus-induced economic crisis, Moody’s Investors Service — the rating services arm of Moody's Corporation (MCO - Free Report) — has downgraded the industry outlook for business development companies (“BDCs”) to negative from stable.
Reason for the Downgrade in Outlook
The rapidly spreading coronavirus along with falling oil prices has resulted in a severe credit shock across most of the sectors and markets. Moody’s believes that the BDC sector will likely be the most affected by the credit shock.
Per Moody’s, the crisis is expected to lead to a deterioration of asset quality, profitability and capital of BDCs. This is the main reason behind Moody’s lowering the outlook for the BDC sector. Moreover, given the implications of the outbreak on public health, Moody's views it as a social risk under its environmental, social and governance (“ESG”) framework.
Notably, Moody’s has also affirmed the ratings of nine individual BDCs, including Goldman Sachs BDC, Inc. (GSBD - Free Report) , Owl Rock Capital Corporation , Ares Capital Corporation (ARCC - Free Report) , BlackRock TCP Capital Corp. (TCPC - Free Report) , FS KKR Capital Corp (FSK - Free Report) , Oaktree Specialty Lending Corporation (OCSL - Free Report) , Prospect Capital Corporation, Solar Capital Ltd. and TPG Specialty Lending, Inc.
Rationale Behind Ratings Affirmation
The virus outbreak, which is expected to lead to an increase in loan non-accruals and defaults, will likely negatively impact earnings and cash flow strength of BDCs, per Moody’s.
Also, the pandemic has resulted in the deterioration in economic outlooks in the United States as well as globally, resulting in declines in commercial activity levels. This has affected the financial profiles of most of the companies, including middle-market businesses within the United States, in which BDCs mainly invest.
Further, per Moody’s, the majority of the sectors will likely witness deterioration in their asset quality if the current operating and economic conditions persist. This will hamper the operating performance and capital strength of BDCs.
However, most of the BDCs that are rated by Moody's have modest exposure to the sectors that are among the hardest hit initially by the pandemic, including travel and leisure, hospitality, gaming, retail, restaurant, and energy, which is a positive.
Also, Moody's rated BDCs have strong liquidity positions, which will result in lower debt repayment risks over the next 1-2 years, with little debt maturing until 2022. In fact, most rated BDCs have sufficient liquidity to fund the immediate draw against commitments by their borrowers.
Thus, despite the expectation of deteriorating asset quality, the ratings of the above-mentioned BDCs have been affirmed by Moody’s, given their strong liquidity positions, adequate capital cushions and conservative investment portfolios.
Free: Zacks’ Single Best Stock Set to Double
Today you are invited to download our latest Special Report that reveals 5 stocks with the most potential to gain +100% or more in 2020. From those 5, Zacks Director of Research, Sheraz Mian hand-picks one to have the most explosive upside of all.
This pioneering tech ticker had soared to all-time highs and then subsided to a price that is irresistible. Now a pending acquisition could super-charge the company’s drive past competitors in the development of true Artificial Intelligence. The earlier you get in to this stock, the greater your potential gain.
See 5 Stocks Set to Double>>