DBRS Publishes Commentary on “DBRS: BDCs Take Measured Approach to New Leverage Limits”

DBRS, Inc. (DBRS) published a commentary titled “DBRS: BDCs Take Measured Approach to New Leverage Limits.”

So far, business development companies (BDCs) have been measured in taking advantage of the higher leverage limit enacted in March 2018. The effective limit was raised from one times (1x) capital to 2x, an increase that DBRS considers as modestly negative for the BDCs’ credit profile. Higher leverage adds risk, but also permits BDCs to enhance their risk profiles by investing in lower risk credits, increasing earnings and enhancing diversification. DBRS will continue to track how BDCs’ leverage and their risk profiles evolve under the new legislation.

Summary highlights of the commentary include:

• Since the passage of the Small Business Credit Availability Act in March 2018 that allows BDCs to increase leverage, over half of the BDCs tracked by DBRS have adopted higher leverage targets.
• Of those adopting the higher leverage, only half have sought shareholder approval resulting in the higher leverage limit becoming immediately effective.
• In DBRS’s view, the slower pace of adoption by the BDCs demonstrates solid corporate governance.
• Given the potential for a slowing economy, competition in middle market lending, and loose underwriting standards, the pace of increase in balance sheet leverage in 2019 will be an important consideration for BDC ratings.

This commentary is available at www.dbrs.com.

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