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.
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
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'
-- 'Global Financial Institutions Criteria' (
--'Investment Manager and Alternative Funds Criteria' (
Global Financial Institutions Rating Criteria
Investment Manager and Alternative Funds Criteria
Managing Director +1-212-908-0827
Senior Director +1-212-908-0369
Source: Fitch Ratings
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