KBRA Affirms Ratings for MSC Income Fund, Inc.

KBRA affirms the BBB- issuer and senior unsecured debt ratings for MSC Income Fund, Inc. ("MSIF" or “the company”). The rating Outlook is Stable.

Key Credit Considerations

The ratings are supported by MSIF’s well diversified $1.1 billion investment portfolio spread among 151 portfolio companies across 30+ industries as of June 30, 2024, with 77.2% of the FV portfolio consisting of senior secured first lien loans. The top three portfolio sectors are Commercial Services & Supplies (7.6%), Internet Software & Services (7.0%), and Electrical Equipment (6.3%), indicating a highly granular portfolio. With a median EBITDA across the portfolio of just $14.1 million, MSIF invests primarily into the comparatively less competitive lower middle market. The company is externally managed by MSC Adviser I, LLC, a wholly owned subsidiary of Main Street Capital Corporation (NYSE: MAIN). The company maintains SEC exemptive relief to co-invest with MAIN and its affiliates with 100% of the investment portfolio overlapped with MAIN as of June 30, 2024. MSIF will continue to co-invest with MAIN as has been the case since 2014. MSIF’s solid management team has a long track record working within the private credit markets and has been together for 20+ years. The MAIN platform, with $7.6 billion in AUM, provides a 25+ year history (when considering predecessor funds) of strong credit performance through economic cycles.

MSIF’s leverage ratio of 0.89x is low relative to peers due to its more restrictive regulatory minimum asset coverage of 200%; however, the company’s asset coverage cushion is just 6.5%, providing a small cushion to withstand additional market volatility in a less favorable economic environment. The company’s funding profile has diversified over time and is comprised of a secured revolving bank facility, a SPV asset facility, and one series of senior unsecured notes. At 2Q24, the ratio of secured debt to gross assets was ~33%, which is consistent with similarly rated peers, reflecting its low leverage despite a highly secured funding profile. As of June 30, 2024, the company had adequate liquidity of $63.3 million in available credit lines and $29.5 million of cash set against $79 million of unfunded commitments and no near-term unsecured debt maturities.

Counterbalancing the strengths are elevated non-accruals at 1.8% and 5.3% at FV and cost, respectively, across 12 portfolio companies as of June 30, 2024, an increase since December 31, 2023, from 1.0% and 4.0% at FV and cost, respectively, across seven portfolio companies. However, all non-accruals are for senior secured first lien loans, likely providing for higher recovery rates. In addition, strengths are counterbalanced by the mostly secured (~73%) funding profile, though somewhat offset by low leverage. Further counterbalancing strengths are potential risks related to MSIF’s illiquid assets, retained earnings constraints as a regulated investment company (RIC), and uncertain economic environment with high base rates, inflation, and geopolitical risks.

Incorporated in 2011 as a Maryland corporation, MSIF is a closed-end, externally managed, non-diversified investment company that has elected to be treated as a business development company under the Investment Company Act of 1940 and as a RIC, which, among other things, must distribute to its shareholders at least 90% of the company’s investment company taxable income.

Rating Sensitivities

A rating upgrade is not expected in the medium term. A rating downgrade and/or Outlook change to Negative could be considered if there is a significant downturn in the U.S. economy with negative impact on MSIF’s earnings performance, asset quality, and leverage, or if regulatory asset coverage is breached. A significant change in senior management and/or risk management policies could also lead to negative rating action.

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