Easy credit rules = more investment risk: S&P

The Small-Business Credit Availability Act was passed by Congress and signed by President Trump to ease assets-to-debt ratios from 2-to-1 to 3-to-2 at "Business Development Companies" — BDCs, firms that bundle corporate debt into funds they sell to investors — notes S&P Global Ratings in a report last week.

The sector includes South Philly-based FS Investment Corp., and rival BDCs owned by BlackRock, Texas Pacific Group, and 76ers owner Josh Harris' Apollo Global, among other big firms.

The change will "increase credit risk" in what is already a competitive business, writes the S&P analyst team, headed by Matthew Carroll. The new law makes BDCs no safer than "other nonbank finance companies," Carroll wrote.

That means S&P expects to drop most of the companies' credit ratings from around BBB- to BB+, the same as other nonbank finance companies, but a notch down from where they deserved to be when the rules were tougher — and just above junk-bond status, which leaves a bond off-limits for many life insurance portfolios and other conservative investors.

S&P is considering downgrades for the entire sector. It slapped a "CreditWatch with negative implications" label on FS Investment, Ares Capital Corp., and Prospect Capital Corp., which have already made plans to cut their assets-to-debt coverage.

The rating agency added a "negative outlook" for Corporate Capital Trust, Goldman Sachs BDC Inc., Hercules Capital Inc., Main Street Capital Corp., Oaktree Specialty Lending Corp., Solar Capital Ltd., TCP Capital Corp., and TPG Specialty Lending Inc. S&P warned it will cut the credit rating of each firm that goes through with plans to boost debt, relative to assets.

S&P also kept existing "negative outlook" advisories on BDCs from Apollo Investment Corp., BlackRock Capital Investment Corp., and PennantPark Investment Corp.

Even with the new rules, companies that keep the old ratios will keep their higher ratings, Carroll added.

FS Investments, based at the former Philadelphia Navy Base, said Monday it has completed a previously announced deal with KKR Advisor LLC, an affiliate of the buyout firm Kohlberg Kravis Roberts, in which KKR will replace Blackstone Group's GSO Capital Partners as the group's primary investment adviser, managing $18 billion in client funds. The funds now distributed by FS and managed by KKR include FS's six BDCs: FS Investment Corp. and FS Investment Corp. II, III, and IV; and Corporate Capital Trust Inc. and Corporate Capital Trust II.

The FS-KKR partnership is the largest of the BDC groups, said Michael Forman, the company's cofounder, chairman, and CEO, in a statement.

(An earlier version of story associated GSO with the wrong previous management firm)