NEW YORK--(BUSINESS WIRE)--Kroll Bond Rating Agency (KBRA) assigns an issuer rating of BBB- to Crescent Capital BDC, Inc. (“CCAP” or “the Company”). The Outlook for the rating is Stable.
Formed in February 2015, CCAP is a publicly traded business development company (BDC), that focuses on originating and investing in primarily first lien secured debt of private U.S. middle-market companies. The Company is externally managed by Crescent Cap Advisors, LLC, an affiliate of Crescent Capital Group LP (Crescent), which together with its subsidiaries has over $28 billion in assets under management, focused on below investment grade credit markets.
Key Credit Considerations
The issuer rating reflects Crescent’s well-established franchise in the middle market lending space, robust origination platform, experienced management team, and strong risk management. The rating is also supported by CCAP’s appropriate debt-to-equity leverage of 0.92x at March 31, 2020 (1Q20) and target of 1.0x-1.3x, current ample asset coverage cushion of 59%, adequate liquidity profile with minimal near-term debt maturities and a diversified investment portfolio comprised predominately of first lien secured loans.
The rating is balanced by the inherent risks associated with operating as a BDC such as distribution requirements that may limit financial flexibility and the illiquid nature of the Company’s portfolio. Further constraints on the rating include CCAP’s limited operating history and limited funding sources with a reliance on secured funding.
As of 1Q20, CCAP had a $883 million investment portfolio comprised primarily of first lien senior secured loans (79%) and smaller exposure to second lien loans (12%), diversified across 127 portfolio companies. The portfolio is defensively positioned with non-cyclical industries representing 83% of the portfolio including Professional & Commercials Services (21%), Healthcare Equipment & Services (20%) and Software & Software Services (17%).
KBRA expects the COVID-19 pandemic will have wide-ranging effects on BDCs and the middle market lending space which may challenge CCAP’s profitability and asset quality metrics. However, KBRA believes that CCAP is currently well-positioned from a capitalization, asset coverage and liquidity standpoint to withstand a near-term impact at the current rating level.
The Stable Outlook is supported by CCAP’s appropriate leverage, adequate liquidity compared to minimal near-term debt matures, minimal non-accruals (1.9% of FMV at 1Q20) and ample asset coverage cushion even in the case of additional portfolio write-downs in an economic downturn.
The ratings have a Stable Outlook. In the near future, a rating upgrade is not expected. However, over time, maintenance of stable asset quality and earnings metrics, maintenance of leverage below the Company’s 1.3x stated maximum and improved funding diversity could lead to positive rating momentum.
The Stable Outlook could be revised to Negative or the rating could be downgraded if a pro-longed downturn in the U.S. economy has material impacts to performance and non-accruals that materially impact capital, leverage and liquidity metrics. An increased focus on riskier investments or a significant change in the current management structure coupled with a negative change in strategy, credit monitoring and/or originations could pressure ratings. KBRA notes that an increase in leverage to fund growth in the current challenged environment, could make the ratings more sensitive to downward pressure should asset quality metrics deteriorate.
KBRA’s ratings incorporate all material credit factors including those that relate to Environmental, Social and Governance (ESG) factors. While ESG factors may influence ratings, it is important to underscore that KBRA’s ratings do not incorporate value-based judgments. Throughout our analysis, KBRA captures the impact of ESG factors in the same manner as all other credit-relevant factors. More information on ESG Considerations for the Financial Institutions can be found here. There were no ESG factors that had significant impact on this rating analysis.
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KBRA is a full-service credit rating agency registered as an NRSRO with the U.S. Securities and Exchange Commission. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider and is a certified Credit Rating Agency (CRA) with the European Securities and Markets Authority (ESMA). Kroll Bond Rating Agency Europe Limited is registered with ESMA as a CRA.