Four Business Development Company Outlooks Revised To Negative On Elevated Energy Exposures, Declining Asset Coverage

Over the past year, some of the U.S. business development companies (BDCs) have incurred increased losses (realized and unrealized), some due to elevated oil and gas exposure and some due to widening credit spreads. We have also observed increasing nonaccrual rates and declining asset coverage ratios for some BDCs. We are in the early innings of a downturn in the credit markets, in our view, and we expect loan losses to rise over the next two years, even if energy prices rebound modestly. Following a review of the BDCs we rate, we are revising our outlook to negative from stable for Ares Capital Corp., FS Investment Corp., Prospect Capital Corp., and Fifth Street Finance Corp. We affirmed the ratings. The

...+ Over the past year, some of the U.S. business development companies (BDCs) have incurred increased losses (realized and unrealized), some due to elevated oil and gas exposure and some due to widening credit spreads. We have also observed increasing nonaccrual rates and declining asset coverage ratios for some BDCs. + We are in the early innings of a downturn in the credit markets, in our view, and we expect loan losses to rise over the next two years, even if energy prices rebound modestly. + Following a review of the BDCs we rate, we are revising our outlook to negative from stable for Ares Capital Corp., FS Investment Corp., Prospect Capital Corp., and Fifth Street Finance Corp. We affirmed the ratings. + The negative outlooks on these BDCs reflect our concern that the downturn in oil and natural gas, as well as a more widespread weakening of credit, could be long-lasting and therefore continue to result in higher loan losses and declining asset coverage metrics. NEW YORK (Standard...

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