KBRA Assigns Rating to Franklin BSP Capital Corporation's $300 Million Senior Unsecured Notes
7 May 2024 | New York
KBRA assigns a rating of BBB- to Franklin BSP Capital Corporation's (“FBCC” or “the company”) $300 million, 7.20% senior unsecured notes due 2029. The rating Outlook is Positive. The net proceeds will be used for general corporate purposes.
Key Credit Considerations
On January 24, 2024, a merger was completed between Franklin BSP Lending Corporation ("FBLC") and FBCC pursuant to the Merger Agreement dated October 2, 2023. FBLC was a non-listed BDC with a ~$2.8 billion investment portfolio at fair value (FV), as of December 31, 2023. FBCC is a non-listed BDC that had a ~$756 million investment portfolio at FV, as of December 31, 2023, prior to the merger. Based on pro-forma financials as of December 31, 2023, the combined company has ~$3.6 billion of total investments at FV, and approximately $2.1 billion of total net assets. FBCC had ~80% overlap with the FBLC portfolio. In addition, the pro forma portfolio consists of 73.6% senior secured first lien debt (79.2% senior secured inclusive of second lien and 96.4% when looking through to the JV, Siena, and Post Road investments). Pro forma gross leverage is 0.73x with unsecured debt to total debt at ~27% which will increase to about 50% with this note issuance.
The merger was effectuated, in part, to free up capital by allowing FBLC once merged to operate under a 150% asset coverage rather than the more restrictive 200% regulatory asset coverage. Management expects to unlock almost $700 million of capital that can be deployed into an attractive origination environment. This transaction is viewed 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, Benefit Street Partners, and the underlying strategy remains the same. The company benefits from its ties to the Adviser with $75 billion in AUM as of January 31, 2024, a wholly owned subsidiary of Franklin Templeton with $1.6 trillion AUM as of January 31, 2024. Furthermore, as of December 31, 2023, the company's pro forma non-accruals were 0.3% and 1.1% at FV and cost, respectively, and its asset coverage ratio was 233%.
Franklin BSP Capital Corporation is a non-traded externally managed non-diversified investment management company regulated as a business development company under the Investment Company Act of 1940. The company has elected to be treated as a regulated investment company. The company is managed by Franklin BSP Capital Adviser L.L.C., an affiliate of Benefit Street Partners, which is an affiliate of Franklin Templeton. The company maintains exemptive relief order from the SEC that allows it to co-invest, subject to certain conditions, with its affiliates.
Rating Sensitivities
A rating upgrade could be considered if the company’s asset quality remains consistent with higher rated peers while it also maintains 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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