NEW YORK, December 19 (Fitch) Continued origination growth amidst declining portfolio yields and increasing leverage are among the trends identified by Fitch Ratings in its business development company (BDC) industry snapshot report published today.CONTINUED GROWTH IN A CHALLENGING ENVIRONMENTDespite challenging operating conditions, portfolio originations have continued to expand at a meaningful rate in 2014. For example, Fitch's BDC industry snapshot report indicates average origination growth of 14.8% for the BDC peer group at September 2014. These dynamics can create concentrated portfolio exposures to a frothy vintage at a time when asset quality metrics are near, what Fitch believes to be, unsustainable lows.DECLINING PORTFOLIO YIELDS PRESSURE DIVIDEND COVERAGEFitch's BDC industry snapshot report also indicates that the average yield has declined to 10.9% at September 30, 2014 from 12.6% in 2010. The decline in net investment income portfolio yields is putting increased pressure on BDC dividend funding. Some BDCs have sought to combat earnings pressure with a cut in dividend payments, which Fitch views as prudent. More cuts may occur, although some firms are looking to offset yield compression with an expanded risk appetite, including the launch of new industry verticals, more highly levered off-balance sheet funds, increased exposure to second lien positions, and higher balance sheet leverage.INCREASING BDC LEVERAGEFitch expects balance sheet leverage to ebb and flow with portfolio activity while being managed around targeted ranges over the longer term. However, an increase in balance sheet leverage can help to offset declines in portfolio yields. Fitch's BDC industry snapshot report indicates that average leverage for investment grade-rated BDCs was 0.62x at Sept. 30, 2014 compared to 0.57x a year before.Fitch's 2015 sector and rating outlooks for BDCs are negative. This reflects Fitch's expectation that several industry challenges could pressure, or at least differentiate, ratings.
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