KBRA Upgrades Ratings for Franklin BSP Capital Corporation

KBRA upgrades the issuer and senior unsecured debt ratings to BBB from BBB- for Franklin BSP Capital Corporation ("FBCC" or "the company"). The Outlook for the ratings is revised to Stable from Positive in conjunction with the rating upgrade.

Key Credit Considerations

The upgrade and ratings are supported by FBCC’s affiliation with Franklin Templeton, a leading global asset manager with $1.6 trillion of AUM as of March 31, 2024, as well as FBCC's ties to Franklin Templeton's wholly-owned subsidiary, Benefit Street Partners ("BSP"), a credit platform with ~$74 billion of AUM. The credit platform includes a ~$24 billion direct lending platform that provides SEC exemptive relief to co-invest among affiliated BSP companies and enhances scale in the competitive private credit environment. In addition, the ratings are supported by FBCC's diversified $3.5 billion investment portfolio (increased from $2.8 billion prior to the merger), comprised of 145 companies across 17 industries, exclusive of investments in JVs, mostly first lien senior secured loans (74.9%, and 92.0% when looking through to the JV, Post Road Equipment Finance, and Siena Capital) to middle market companies as of March 31, 2024. The top three portfolio sectors, exclusive of investments in JVs, are Healthcare (19.2%), Business Services (16.4%), and Financials (14.2%).

Further supporting the ratings are the appropriate leverage at 0.78x (when including preferred equity as debt in the calculation), in line with FBCC's target leverage range of 1.0x-1.20x, and solid access to the capital markets with a diversified funding mix of secured bank facilities and unsecured debt, including the most recent $300 million senior unsecured debt offering in May 2024 which provides greater financial flexibility and increased unencumbered collateral for the benefit of unsecured noteholders. While unsecured debt to total debt is on the lower range of peers, the ratio was lifted to 47% on a pro-forma basis when including the post quarter issuance. Furthermore, FBCC intends to issue additional unsecured debt as it grows its balance sheet provided by its lower asset coverage regulatory minimum of 150% from 200% pre-merger. The company's pro forma liquidity is sufficient with available credit lines and cash of $938.0 million compared with $400 million of unsecured debt due within two years of March 31, 2024, and unfunded portfolio company commitments of $326.7 million.

FBCC's credit quality remains stable with non-accruals to total investments at cost and FV of 1.3% and 1.0%, respectively, and remains in line with peers. The company has ~18% of its assets invested in a JV consisting mostly of senior secured first lien loans to large EBITDA companies, an equipment finance company, Post Road Equipment Finance, consisting of a diversified portfolio of secured loans, and Siena Capital, an asset based lender with a high quality diversified loan portfolio. These investments have no non-accruals and maintain high returns.

Strengths are counterbalanced by potential risks related to FBCC’s business as a business development company (BDC), the illiquid nature of the assets, and retained earnings constraints as a regulated investment company (RIC), as well as an uncertain economic environment with high base rates, inflation, and geopolitical risks.

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 an RIC. The company is managed by Franklin BSP Capital Adviser L.L.C., an affiliate of Benefit Street Partners, which is a wholly-owned subsidiary of Franklin Templeton.

Rating Sensitivities

Given the rating upgrade, ratings are unlikely to be upgraded further in the medium term. The Outlook could be revised to Negative, or the ratings could be downgraded, if there is a significant downturn in the U.S. economy that has a negative impact on earnings performance, asset quality, and leverage. Other unexpected asset quality deterioration, a rise in leverage metrics, or a significant change in senior management could also pressure the ratings.

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