Formed in February 2015, Crescent Capital is a publicly traded business development company that primarily originates and invests in first lien secured debt of private U.S. middle-market companies. The company is externally managed by Crescent Cap Advisors, an affiliate of Crescent Capital Group, which together with its subsidiaries has more than $28 billion in assets under management and is focused on below investment grade credit markets.
According to KBRA, the issuer rating reflects Crescent’s well-established franchise in the middle market lending space, robust origination platform, experienced management team and strong risk management. The rating also is supported by its appropriate debt-to-equity leverage of 0.92x at March 31, 2020 and target of 1.0x-1.3x, current ample asset coverage cushion of 59%, adequate liquidity profile with minimal near-term debt maturities and a diversified investment portfolio comprised predominantly of first lien secured loans.
The rating is balanced by the inherent risks associated with operating as a business development company, such as distribution requirements that may limit financial flexibility and the illiquid nature of the company’s portfolio. Further constraints on the rating include the company’s limited operating history and limited funding sources with a reliance on secured funding.
As of Q1/20, Crescent Capital had a $883 million investment portfolio, primarily made up of first lien senior secured loans (79%) and second lien loans (12%) across 127 portfolio companies. The portfolio is defensively positioned with non-cyclical industries representing 83% of the portfolio, including professional and commercials services (21%), healthcare equipment and services (20%), and software and software services (17%).
KBRA expects the COVID-19 pandemic will have wide-ranging effects on business development companies and the middle market lending space, which may challenge Crescent Capital’s profitability and asset quality metrics. However, KBRA believes that Crescent Capital is well-positioned from a capitalization, asset coverage and liquidity standpoint to withstand a near-term impact at the current rating level.
The stable outlook is supported by the company’s appropriate leverage, adequate liquidity compared with minimal near-term debt matures, minimal non-accruals (1.9% of FMV at Q1/20) and ample asset coverage cushion even in the case of additional portfolio write-downs in an economic downturn, according to KBRA. In the near future, a rating upgrade is not expected. However, over time, maintenance of stable asset quality and earnings metrics, maintenance of leverage below the company’s 1.3x stated maximum and improved funding diversity could lead to positive rating momentum.
The stable outlook could be revised to negative or the rating could be downgraded if a prolonged downturn in the U.S. economy has material impacts to performance and non-accruals that materially impact capital, leverage and liquidity metrics. An increased focus on riskier investments or a significant change in the current management structure coupled with a negative change in strategy, credit monitoring and/or originations could pressure ratings. KBRA notes that an increase in leverage to fund growth in the current challenged environment could make the ratings more sensitive to downward pressure should asset quality metrics deteriorate.