Fitch Ratings has affirmed
The ratings have been removed from Rating Watch Negative. The Rating Outlook is Stable.
On
Key Rating Drivers
The removal of the Negative Watch reflects Fitch's expectation that following the
Unsecured debt accounted for 51.1% of TCPC's total debt at
Fitch believes TCPC's improved liquidity following the notes issuance will allow for the maintenance of a sufficient liquidity cushion for both unfunded commitments and operating expenses after the repayment of the notes due
As of
The affirmation of TCPC's ratings continues to reflect the affiliation with
Rating constraints for business development companies (BDCs) include the market impact on leverage, given the need to fair-value the portfolio each quarter, dependence on access to the capital markets to fund portfolio growth and limited ability to retain capital due to dividend distribution requirements. Additionally, Fitch believes BDCs will experience weaker asset quality metrics in 2024, given the challenging economic backdrop, elevated interest rates and an increasingly competitive underwriting environment as private credit lenders grow and banks re-enter the space.
At
Leverage has risen steadily over the last four years, partially a result of cumulative net realized and unrealized portfolio losses, and is at the higher end of the peer group. In 1Q24, TCPC began disclosing a 0.9x-1.20x regulatory leverage target. Fitch would view a reduction in leverage favorably. The notes issuance is not expected to have a material impact on leverage as proceeds will be used to repay outstanding borrowings.
Net realized losses were elevated in 2023, amounting to 2% of the average portfolio at value. TCPC generated a modest net realized loss (0.01%) in 1Q24. As of
Fitch believes asset quality metrics may deteriorate further in 2024, given existing non-accrual investments, continued elevated interest rates and a challenging macroeconomic environment. A meaningful increase in non-accrual levels and/or the recognition of material realized losses could result in negative rating action.
The Stable Rating Outlook reflects Fitch's expectation that TCPC will continue to focus on senior debt investments. Additionally, the Outlook reflects Fitch's expectation that TCPC will maintain unsecured debt to total debt above 35%, maintain leverage near or below current levels, and maintain ample liquidity and solid dividend coverage. While modest incremental credit losses are anticipated, given the recent up-tick in non-accrual levels, the Stable Outlook does not reflect expectations for meaningful realized losses or a significant uptick in non-accruals from 1Q24 levels.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Further deterioration in non-accrual levels, meaningful realized credit losses, a sustained decline in the unsecured funding mix below 35% of total debt, failure to maintain a sufficient liquidity cushion for unfunded commitments and operating needs, a sustained increase in gross leverage or an inability to maintain the asset coverage cushion above 11%, weaker cash-based net investment income (NII) coverage of the dividend and/or an elevation in the portfolio risk profile, including a material decline in first lien loans as a percentage of the portfolio, without a commensurate decline in leverage could yield negative rating action.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Positive rating momentum is limited over the near-term given the recent deterioration in credit metrics. However, over time, positive rating momentum could be driven by strong and differentiated credit performance and a sustained increase in the asset coverage cushion over 33%, maintenance of consistent core earnings performance, demonstrated economic access to unsecured funding that results in the maintenance of unsecured debt to total debt of at least 40%, and ample liquidity and solid cash-based NII coverage of the dividend.
DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS
The 'BBB-(EXP)' rating assigned to the new unsecured notes is equalized with the rating of the existing unsecured notes as the notes will rank equally in the capital structure. The alignment of the secured and unsecured debt ratings with the Long-Term IDR reflects Fitch's expectations for solid collateral coverage for all classes of debt since TCPC is subject to a 150% asset coverage requirement and has a meaningful unsecured funding component.
DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES
Upon settlement of the unsecured notes issuance, Fitch would convert the expected rating on the new unsecured notes to a final rating of 'BBB-'.Thereafter, the secured and unsecured debt ratings are primarily linked to the Long-Term IDR and are expected to move in tandem. However, a material reduction in unsecured debt as a proportion of total debt could result in the unsecured debt rating being notched down from the IDR.
ADJUSTMENTS
The Standalone Credit Profile (SCP) has been assigned in line with the implied SCP.
The Capitalization & Leverage score has been assigned below the implied score due to the following adjustment reason(s): Historical and future metrics (negative).
The Funding, Liquidity & Coverage score has been assigned below the implied score due to the following adjustment reason(s): Funding flexibility (negative).
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visitwww.fitchratings.com/topics/esg/products#esg-relevance-scores.
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