KBRA Affirms Ratings for MSC Income Fund, Inc.
20 Oct 2023 | New York
KBRA affirms the BBB- issuer and senior unsecured debt ratings for MSC Income Fund, Inc. ("MSIF" or “the company”). The Outlook for the ratings is Stable.
Key Credit Considerations
The ratings are supported by MSIF’s $1.1 billion diversified investment portfolio spread among 144 portfolio companies and other entities across 30+ industries, as of June 30, 2023, with 79.9% of the portfolio (fair value) consisting of senior secured first lien loans. MSIF has a highly experienced management team that has been together for 20+ years. The company adopted a conservative dividend policy with a lower targeted payout once it was reinstated in 2021. MSIF suspended its dividend in 2Q20 for two quarters due to pandemic pressures and forced amortization of its Deutsche Bank revolving credit line that was subsequently refinanced with a new credit facility in February 2021. The funding profile further improved in late 2021 and early 2022 with the issuance of $150 million of senior unsecured debt, which increased its unsecured debt outstanding, now at 31% of total debt, thus generating greater operating flexibility and reduced asset encumbrance. In 3Q23, at the company's request, the size of its JPMorgan secured credit facility was reduced by $25 million to $300 million and the maturity was extended by three years to 2028 under the same existing terms and conditions. MSIF’s leverage ratio of 0.79x is low relative to peers due to its more restrictive regulatory minimum asset coverage of 200%; therefore, the company’s asset coverage cushion is relatively small at 12.9%. The company maintains SEC exemptive relief to co-invest with Main Street Capital Corporation ("MAIN"), the parent company owner of MSIF's asset manager, and its affiliates with 100% of the investment portfolio overlapped with MAIN, as of June 30, 2023. MSIF will continue to co-invest with MAIN as has been the case since 2014. Strengths are counterbalanced by the illiquid nature of the assets, retained earnings constraints as a Regulated Investment Company (RIC), and a predominantly secured funding profile. The company has exhibited some earnings volatility (net of realized and unrealized gains/losses) throughout the years, though has maintained generally stable net investment income. MSIF also had four companies on non-accrual status, as of 2Q23, comprising 3.2% and 0.6% of total loans at cost and fair value, respectively.
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/or leverage. A change in key senior management and/or risk management policies could also lead to negative rating action.
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