DBRS Morningstar Revises Trend on FCRD to Stable; Confirms LT Ratings at BB (H), Withdraws Ratings

DBRS, Inc. (DBRS Morningstar) has confirmed the BB (high) Long-Term Issuer Rating and Long-Term Senior Debt rating of First Eagle Alternative Capital BDC, Inc. (FCRD or the Company). Concurrently, the trend on all ratings has been revised to Stable from Negative. The Company’s Intrinsic Assessment (IA) is BB (high) and its Support Assessment is SA3. Subsequently, DBRS Morningstar has withdrawn all ratings of FCRD at the request of the Company.

KEY RATING CONSIDERATIONS
The trend revision to Stable recognizes the progress FCRD has made improving its risk profile by largely completing the transition of the investment portfolio from unsponsored, concentrated positions to a more diversified portfolio centered on first lien, senior secured loans to sponsor-backed portfolio companies. The transition has reduced the risk of an outsized loss on any single investment that could have a material impact on the Company’s cushion to regulatory leverage limits. Moreover, DBRS Morningstar views that some key sources of uncertainty related to the pandemic are behind us, contributing to the broader market certainty and investor conviction. Most businesses have adapted to social distancing practices and periodic government restrictions on activities that address recent waves in new virus cases. The successful vaccination roll-out to communities across the U.S. continues which should support a more permanent reopening of the economy. Consistent with our moderate economic scenario published May 4th, 2021, expectations are for a strong economic recovery in 2021, buffered by government stimulus and central bank actions that should produce robust origination pipelines for business development companies (BDCs). We expect some deterioration in credit quality across the BDC sector due to specific portfolio company situations. This concern is somewhat mitigated by support of FCRD’s portfolio companies from private equity sponsors, which may selectively invest additional capital in their portfolio companies.

The ratings confirmation considers FCRD’s solid franchise in lending to U.S. middle market companies and seasoned management team that has worked together through several credit cycles. The Company’s prudent management of leverage while repositioning the investment portfolio is also a consideration in the ratings. With the repositioning largely complete and the balance sheet modestly levered, the Company capitalized on increasing merger and acquisition activity in the middle market space to make several new and follow-on investments, which should benefit earnings in 2021. FCRD’s modest near-term refinancing requirements and funding profile that is more balanced with unsecured funding than most BDCs are also considered in the ratings.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Non-Bank Financial Institutions (September 29, 2020): https://www.dbrsmorningstar.com/research/367510/global-methodology-for-rating-non-bank-financial-institutions. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021): https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The primary sources of information used for this rating include Company Documents and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.

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