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DBRS Morningstar: 2Q21 BDC Earnings Momentum with Robust Origination Activity and Strong Pipelines

This commentary reviews the 2Q21 results for Business Development Companies (BDCs). BDC earnings continue to demonstrate improving trends with consistency of net interest income and an increase of net realized and unrealized gains due to improving portfolio fundamentals and tightening credit spreads.

Key highlights include:

-- BDCs are reporting continued robust origination activity, contributing to generally stable investment portfolios which is a key driver of BDC earnings. While emerging COVID-19 variants and limited vaccine penetration in some areas continue to pose some level of risk, we anticipate a continuing economic recovery in 2H21 and 2022.
-- Non-accruals across the peer group remain manageable. Non-accrual loans have been declining since peaking in 2020, now at 3.0%, on average, across the peer group. While still elevated versus historical levels, we see the peer group as having managed well through the abrupt onset of the COVID-19 pandemic and related shutdowns.
-- Liquidity levels have come down, as expected, as business momentum continues and investment opportunities arise.
-- Our BDC coverage universe maintains relatively low leverage when compared to regulatory limits, with debt-to-equity averaging 0.83x in 2Q21.

“For our BDC peer group, we see certain factors contributing to credit quality, including the benefit of sponsor support, selectivity of investment opportunities and sector focus. We remain cognizant of BDCs' middle market exposures that are highly reliant upon sponsor support as a first line of defense, as loans that turn to non-accrual are generally due to lack of additional sponsor capital. We take comfort in the fact that sponsors have generally been supportive throughout this extended downturn, benefiting credit performance,” said Lisa Kwasnowski, Senior Vice President – Global FIG.