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Business Development Companies Face Various Pressures from Coronavirus Pandemic; Outlook Negative

DBRS, Inc. (DBRS Morningstar) published a commentary highlighting the effects of the Coronavirus Disease (COVID-19) on Business Development Companies (BDCs). DBRS Morningstar reviews its outlook on the BDC sector as the coronavirus continues to spread globally.

Key highlights include:

-- The Negative outlook for BDCs considers the adverse economic impact of COVID-19 to credit fundamentals of BDCs and their portfolio companies.
-- In assessing potential risks to BDCs in this operating environment, DBRS Morningstar considers the impact of unrealized losses on regulatory leverage limits and credit facility covenants, liquidity constraints, and the credit quality of existing portfolio companies. We also consider the effectiveness of economic relief policy initiatives by the U.S. government as well as regulatory relief for BDCs from the SEC.
-- Overall, DBRS Morningstar anticipates significant challenges for BDCs in this operating environment, which is reflected by the rating actions taken on BDCs by DBRS Morningstar since late March.

“The Negative outlook considers the abrupt and severe economic downturn caused by the Coronavirus Disease (COVID-19), combined with the uncertainty of its magnitude or duration. Given the BDCs' focus on direct lending to U.S. middle market companies, many of which are facing significant challenges, we expect an adverse impact on the credit fundamentals of the BDCs and their respective portfolio companies. The extent of the impact will vary depending upon each BDC's industry exposures and underwriting criteria, amongst other things. We expect this adverse environment to pressure the BDCs' leverage and financial covenants,” said David Laterza, Senior Vice President.

Notes:
The commentary is available at

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