The trend on all ratings is Stable. The Company's Intrinsic Assessment (IA) is BBB (low), while its Support Assessment is SA3 resulting in the final rating being positioned in line with the IA.
KEY RATING CONSIDERATIONS
The confirmation of the ratings reflect the Company's solid franchise which is supported by its scale, expertise and longevity in the industry, its profitable track record, diverse funding profile and low leverage. The ratings also consider the Company's relatively higher risk portfolio due to the sizeable presence of subordinated and equity investments, as well as asset class concentrations in real estate, consumer finance and structured investments.
The Stable trend reflects our expectation that the Company will continue to generate sound operating results while maintaining credit risk discipline and prudent leverage levels. That said, a contraction or sluggishness in
RATING DRIVERS
The ratings would be upgraded if the Company further improves its overall risk profile by increasing the proportion of its secured first lien loan portfolio closer to the average of the higher rated peers while reducing the proportion of its outstanding investments in structured notes, consumer finance and real estate. Conversely, a prolonged weakening in credit fundamentals and/or a meaningful deterioration in the buffer to the debt facility covenants or regulatory requirements would result in a ratings downgrade.
RATING RATIONALE
PSEC's franchise strength is anchored by its scale, well-established market presence and long operating history. The Company's franchise is also supported by its experienced management team that as one of the earliest publicly listed business development companies (BDCs) has navigated it through various economic and investment cycles. With an investment portfolio totaling
The Company has mostly remained profitable on an annual basis since inception. Even though earnings volatility is typical in the BDC space due to fair value reporting, PSEC's notable portion of equity and CLO investments partly exacerbates such variability. The Company generated solid operating results for the fiscal year 2022 (or FY22, twelve months ending
The Company's risk profile is considered elevated given its sizeable exposure to subordinated investments of
PSEC's portfolio risk exposure is mitigated by its well-defined risk management processes embedded in new investment assessments, underwriting, monitoring and restructuring capabilities. Additionally, we consider the Company's use of an independent third party valuation firm for each investment on a quarterly basis as the best in class standard for the BDC sector. Credit performance has been acceptable with non-accruals as a percent of the total portfolio at cost at 2.6% at
PSEC has a solid funding profile with access to diversified funding channels and a broad investor base. At
PSEC has historically demonstrated a disciplined capital management approach by maintaining leverage close or below the Company's target leverage. The Company targets leverage of 0.70x to 0.85x, defined by PSEC as net debt-to-equity and including preferred stock in total equity. At
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
General Considerations
There were no Environmental/ Social/ Governance factor(s) that had a significant or relevant effect on the credit analysis
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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (
Notes:
All figures are in
The principal methodology is the Global Methodology for Rating Non-Bank Financial Institutions: https://www.dbrsmorningstar.com/research/402314/global-methodology-for-rating-non-bank-financial-institutions (
The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.
The primary sources of information used for this rating include Morningstar Inc. and Company Documents. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.
The rating was initiated at the request of the rated entity.
The rated entity or its related entities did participate in the rating process for this rating action.
DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
This is a solicited credit rating.
The conditions that lead to the assignment of a Negative or Positive trend are generally 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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