GSBD leverage vote met with upbeat Fitch rating, S&P rating withdrawal

The twin decisions showcased the different views of recent BDC statute changes the two ratings firms have adopted.

Goldman Sachs BDC (GSBD) has won an investment-grade label from Fitch Ratings but was downgraded to speculative status by S&P – and later had its rating withdrawn – after the business development company won shareholder approval for additional borrowing capacity.

The mid-market lender of the eponymous investment bank received a BBB- rating from New York-based Fitch, which also assigned a stable outlook to the entity as well on Monday. For its part, S&P notched GSBD’s rating down to BB+ from BBB-, which put the firm on junk status. GSBD subsequently asked S&P to pull its rating. Moody’s does not rate the BDC.

“The investment grade rating from Fitch is noteworthy as we seek to capitalise on the broader range of financing strategies available to the Company following the passage of the Small Business Credit Availability Act,” GSBD chief financial officer Jonathan Lamm said in a statement, referring to the law that allowed BDCs the option to increase its leverage.

The firm declined to comment further on the Fitch rating or why it requested its S&P rating be rescinded.

Last week, GSBD secured overwhelming approval from its stockholders to allow a leverage capacity of a 2:1 debt-to-equity ratio. The polling took place at a shareholder meeting where those participating were also asked to approve a board nomination and the ratification of PricewaterhouseCoopers as GSBD’s auditor.

Some 94.74 percent of voting shareholders, or 14.05 million of the 14.83 million ballots cast, supported the leverage measure. In conjunction with its approval, GSBD cut its management fee from 1.5 percent to 1 percent. Some 15.88 million votes were not cast for the leverage proposal, though the same amount did not vote on the board nomination.

The BBB- designation from Fitch came a result of, among other things, GSBD’s more favourable risk profile than some of its peers due to its focus on senior debt and an “absence of material equity” positions, according to a statement from the ratings agency. Another factor was a “strong history” of GSBD routinely covering its dividend.

Fitch noted that the GSBD’s “cushion” in relation to its financial covenants and asset coverage requirements was weakened, a development it sees a “incrementally negative”. Regardless, GSBD has managed its finances with “adequate cushion” in the past, but if that changes, it could be to the detriment of the investment-grade rating.

S&P has taken a decidedly more negative stance on BDCs’ ability to increase their leverage, going so far as to automatically downgrade any BDC that pursues that extra borrowing capacity to an automatic junk rating of BB+.

“We believe the potential for increased leverage, in an already competitive environment, increases credit risk in the BDC industry,” the ratings agency said on a conference call shortly after the change in statutes occurred. “Relative to other finance companies BDCs’ creditworthiness has benefitted from a stronger institutional framework, including leverage constraints.”

Apollo Investment Corporation (AINV) also received a downgrade from S&P to BB+ following its decision to increase its leverage profile as well. The firm increased its operating leverage target to 1.25x to 1.4x. For its part, AINV did not request S&P withdraw its rating.

AINV’s chief financial officer Gregory Hunt said on the firm’s earnings call, “While we’re disappointed in S&P’s actions, which we believe are rooted in their view of the industry and not AINV specifically. We do not believe that their action is an impediment to our successful execution of our go forward strategy.”