News Column

Fitch Expects to Rate FS Investment Corp's Unsecured Notes 'BBB-'

July 7, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings expects to assign a rating of 'BBB-' to FS Investment Corp's (FSIC) unsecured institutional debt issuance. Fitch does not expect there to be a material impact on the company's leverage as a result of the issuance, as proceeds will be used to repay borrowings on secured credit facilities.

Fitch views the firm's ability to access the institutional bond market and add an unsecured component to its funding structure favorably. Access to this market will provide FSIC with more funding flexibility going forward, in Fitch's opinion.

KEY RATING DRIVERS

The equalization of the unsecured ratings with the secured debt rating reflects FSIC's relatively low leverage, its focus on senior debt investments, and Fitch's expectation that proceeds from the issuance will be used to repay a portion of secured debt outstanding.

FSIC's Stable Outlook reflects Fitch's expectations for continued operating consistency, improved earnings yields, given the continued shift into less-liquid direct originations, and the maintenance of good asset quality, modest leverage, and strong dividend coverage.

That said, Fitch sees a number of emerging industry challenges that could pressure business development company (BDC) ratings more broadly, or at least increase rating differentiation amongst BDCs over a longer-term horizon. These challenges include a potential increase in regulatory leverage limits and increased competition, which are yielding tighter market spreads and looser underwriting terms, including higher underlying portfolio company leverage and weaker covenant packages. Should competition continue to intensify, market yields could decline further, which would reduce earnings generation and pressure dividend coverage for the space.

RATING SENSITIVITIES

Positive rating momentum for FSIC could develop over time with increased funding flexibility, including an extension of the debt maturity profile, continued access to the public unsecured debt markets, and the ability to opportunistically issue public equity for growth capital. Other positive rating factors would include a continuation of solid asset quality performance, particularly given the competitive market environment.

Conversely, negative rating actions could be driven by an extended increase in leverage above the targeted range of approximately 0.70x-0.75x, resulting from increased borrowings or material realized or unrealized depreciation, and/or a meaningful increase in the proportion of equity holdings without a commensurate decline in leverage. A spike in non-accrual levels, an inability to refinance near-term debt maturities, or weaker cash income dividend coverage would also be viewed unfavorably from a ratings perspective.

FSIC is an externally managed business development company, organized in December 2007 and commencing investment operations in January 2009. As of March 31, 2014, the company had investments in 148 portfolio companies amounting to approximately $4.1 billion.

Fitch assigns the following expected rating:

FS Investment Corp

--Unsecured debt at 'BBB-(EXP)'.

Existing ratings on FSIC are as follows:

FS Investment Corp

-- Long-term IDR 'BBB-'; and

-- Secured debt 'BBB-'.

The Rating Outlook is Stable.

Additional information is available at 'www.fitchratings.com'

Applicable Criteria and Related Research:

-- 'Global Financial Institutions Criteria' (January 2014);

--'Investment Manager and Alternative Funds Criteria' (December 2013).

Applicable Criteria and Related Research:

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397

Investment Manager and Alternative Funds Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=725057

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=838276

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Meghan Neenan, CFA Senior Director

+1-212-908-9121

Fitch Ratings, Inc.33 Whitehall St.New York, NY 10004

or

Secondary Analyst Nathan Flanders

Managing Director +1-212-908-0827

or

Committee Chairperson Tara Kriss

Senior Director +1-212-908-0369

or

Media Relations:

Brian Bertsch, +1-212-908-0549 (New York)

brian.bertsch@fitchratings.com


Source: Fitch Ratings


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