NEW YORK–(BUSINESS WIRE)–#creditratingagency–In connection with the BDC merger described below, KBRA withdraws the BBB- issuer and senior unsecured debt ratings of Franklin BSP Lending Corporation (“FBLC”) and assigns BBB- issuer and senior unsecured debt ratings to Franklin BSP Capital Corporation (“FBCC”). The Outlook for the ratings is Positive.
Key Credit Considerations
On January 24, 2024, a merger was completed between FBLC and FBCC pursuant to the Merger Agreement dated October 2, 2023. FBLC, which KBRA has rated since 2015, was a non-listed BDC with a $2.8 billion investment portfolio at fair value (FV), as of September 30, 2023. Formed in January 2020, FBCC is a non-listed BDC with a $759 million investment portfolio at FV, as of September 30, 2023, prior to the merger. Based on pro-forma financials as of September 30, 2023, the combined company has $3.6 billion of total investments at FV, and approximately $2.1 billion of total net assets. FBCC has ~80% overlap with the FBLC portfolio. In addition, the pro forma portfolio consists of 72.6% senior secured first lien debt (79.2% senior secured inclusive of second lien and 90.0% when looking through to the JV, Siena, and Post Road investments), 94.7% floating rate investments, and 44% entry LTV. Pro forma gross leverage is 0.77x, and unsecured debt to total debt is ~26%.
As FBCC is the surviving entity, the merger results in FBCC operating under the 150% regulatory asset coverage ratio, which management expects to unlock almost $700 million of capital that can be deployed into an attractive origination environment. We view this transaction as a neutral event to the rating as a lower asset coverage will provide more financial flexibility with higher asset cushion as a merged company than the more restrictive asset coverage (200%) that was maintained by FBLC prior to the merger. At the same time, leverage is expected to remain in line with peers at about 1.2x. There is no change to FBCC’s Adviser, Franklin BSP Capital Adviser L.L.C, and the underlying strategy remains the same.
A rating upgrade could be considered if the company’s asset quality remains consistent with higher rated peers while maintaining focus on senior secured lending, solid asset coverage, an adequate liquidity profile, and conservative leverage. A rating downgrade and/or Outlook change to Stable/Negative could be considered if there is a shift in strategy that involved significantly increasing the leverage profile or if asset quality were to deteriorate. A significant change in senior management and/or risk management policies could also lead to negative rating action.
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A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the Information Disclosure Form(s) located here.
Information on the meaning of each rating category can be located here.
Further disclosures relating to this rating action are available in the Information Disclosure Form(s) referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.
Kroll Bond Rating Agency, LLC (KBRA) is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is registered as a CRA with the European Securities and Markets Authority. Kroll Bond Rating Agency UK Limited is registered as a CRA with the UK Financial Conduct Authority. 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.
Doc ID: 1003146
Kevin Kent, Director (Lead Analyst)
Teri Seelig, Managing Director
Joe Scott, Senior Managing Director (Rating Committee Chair)
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