Fitch Affirms SLR Investment Corporation at 'BBB-'; Outlook Stable

Published: 2025-07-01 05:00:23 ET SLRC

Published on 07/01/2025 at 05:00

Fitch Ratings has affirmed SLR Investment Corporation's (SLRC) Long-Term Issuer Default Rating (IDR) and unsecured debt rating at 'BBB-'.

Additionally, Fitch affirmed SLRC's senior secured debt rating at 'BBB'. The Rating Outlook is Stable.

Today's rating actions have been taken as part of a broader review of a group of business development companies (BDCs), which included eight publicly rated firms. For more information on the peer review, please see 'Fitch Ratings Completes Peer Review of 8 US BDCs,' available at www.fitchratings.com.

Key Rating Drivers

First-Lien Focus: The rating affirmations reflect SLRC's first-lien portfolio profile, appropriate asset coverage cushion, sound liquidity, and differentiated investment strategy, which allows management to deploy capital opportunistically between its various specialty finance verticals.

Rating Constraints: Rating constraints include SLRC's weaker-than-peer unsecured funding mix, a decline in dividend coverage metrics, and higher relative exposure to non-qualifying assets, which were 26.5% of total assets at March 31, 2025 (1Q25). These consisted of of equity investments in its asset-based lending, equipment finance, and a life science portfolio. Rating constraints also include a lack of affiliation with a broader investment platform, which could be a headwind should bank financing become more constrained for the sector.

Competitive Underwriting Environment: Rating constraints for BDCs include the market impact on leverage, dependence on access to the capital markets to fund growth and limited ability to retain capital. Fitch believes BDCs will face a competitive underwriting environment, weaker earnings and dividend coverage metrics, and deterioration in asset quality metrics throughout 2025.

Above-Average Equity Exposure: In addition to senior secured cash flow loans, SLRC provides asset-based loans and equipment financing and leasing solutions through its equity holdings in SLR Credit Solutions (Crystal), SLR Equipment Finance (NEF), Kingsbridge Holdings, LLC (Kingsbridge), SLR Healthcare ABL (SLR Healthcare), and SLR Business Credit.

SLRC's portfolio is more concentrated than peers given these equity investments accounted for approximately 40.9% of the portfolio at fair value at 1Q25, which could yield elevated valuation volatility over time. However, if the underlying investments were consolidated on SLRC's balance sheet, the portfolio on a 'look through' basis would be 96.4% first-lien senior secured loans.

Low Non-Accruals: SLRC had one investment on non-accrual status at 1Q25, representing 0.7% of the debt portfolio at value and 1.0% at cost, which is below the rated peer average and improved from a year ago. SLRC's net realized losses as a percentage of the average portfolio at value averaged 0.8% annually over the trailing four-year (2021-2024) period, which was above the rated BDC average. Fitch believes elevated rates will pressure credit performance, which could yield additional amendment requests, PIK income and increased non-accruals.

Earnings Headwinds: SLRC's net investment income (NII) amounted to 4.3% of the average portfolio at cost, annualized, in 1Q25. This was down from 4.4% a year ago and remained below the rated peer average given the focus on lower-yielding first lien investments. Higher interest rates boosted BDCs' earnings in recent years, but NII yields declined following interest rate cuts and spread compression in 2024. Fitch believes the potential for additional rate cuts and non-accruals will further pressure NII.

Leverage Within Target: At 1Q25, SLRC's leverage (par debt-to-equity) was 1.06x, or 1.04x net of cash, which was consistent with management's targeted range of 0.9x-1.25x, on a net basis. The gross leverage ratio implied an asset coverage cushion of 22.9% at 1Q25, which was up from 19.1% a year earlier, and within Fitch's 'bbb' category benchmark range of 11%-33%. Fitch expects the firm will continue to maintain the covenant cushion at an appropriate level to account for potential valuation volatility in the portfolio and/or future credit losses.

Weak Unsecured Funding Mix: Unsecured debt amounted to 34.2% of SLRC's outstanding debt at 1Q25, which was below both the rated peer average and Fitch's 'bbb' category benchmark range of 35%-100%. Fitch expects SLRC will consider issuing unsecured debt in the second half of 2025, which would return the unsecured mix above 35%. Failure to improve and maintain the unsecured funding mix within the 'bbb' category range on a sustained basis could result in a one-notch ratings downgrade.

Strong Liquidity: SLRC's liquidity is solid, with $467 million of cash and equivalents and $421 million in aggregate borrowing capacity under its credit facilities, subject to borrowing base requirements, as of 1Q25. Unfunded commitments at 1Q25 totalled $268.6 million, including $72.4 million to the specialty finance equity investments the firm has discretion to fund. SLRC's next maturity is not until December 2026 when $75 million of unsecured notes comes due.

Decline in Dividend Coverage: GAAP NII coverage of dividends declared was 98.8% in 1Q25, down from 107.6% in 2024, and below the rated BDC average. However, cash-based NII coverage of the dividend, adjusted for PIK income net of collections, was above peers, at 95.4% in 1Q25 given relatively low exposure to PIK income. Fitch expects GAAP NII to fully cover the dividend over time.

Stable Outlook: The Stable Rating Outlook reflects Fitch's expectations for a continued focus on senior debt investments, relatively solid asset quality metrics, access to sufficient liquidity, maintenance of an appropriate cushion relative to the asset coverage requirement, and an improvement in the unsecured funding mix to 35% or more of total debt.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

A sustained unsecured funding mix below 35% of total debt could result in a one-notch downgrade. Additional potential triggers for negative rating momentum include the company's asset coverage cushion falling below 11%, a sustained increase in non-accrual levels, meaningful realized losses, a material risk profile change-such as a material decline in first-lien positions or a shift toward subordinated debt or pure equity investments without a commensurate decline in leverage-or failing to fully cover the dividend on a NII basis.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Strong and differentiated asset quality performance in recent vintages-evaluated alongside stable and consistent operating performance, valuation and underlying portfolio metrics that include leverage and interest coverage-could yield positive rating momentum.

Additionally, a sustained improvement in cash-earnings dividend coverage, the maintenance of unsecured debt of at least 40% of total debt, a strong liquidity profile and consistent core operating performance would also be viewed positively. Although not envisioned, a reduction in the leverage target not accompanied by an offsetting increase in the portfolio risk profile could also contribute to positive rating momentum.

DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS

The senior secured debt rating of 'BBB', one notch above SLRC's Long-Term IDR, reflects Fitch's view of good recovery prospects in a stress scenario given its funding mix and available asset coverage.

The alignment of the unsecured debt rating with the Long-Term IDR reflects average recovery prospects under a stress scenario, as SLRC is subject to a 150% asset coverage limitation and has a meaningful unsecured funding component.

DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES

The secured and unsecured debt ratings are primarily linked to the Long-Term IDR and are expected to move in tandem, although the notching could change if there is a shift in funding mix or reduction in reduction in available asset coverage, which Fitch believes impacts the recovery prospects of the instruments in a stress scenario.

ADJUSTMENTS

The Standalone Credit Profile (SCP) has been assigned in line with the implied SCP.

The Earnings & Profitability score has been assigned above the implied score due to the following adjustment reason(s): Portfolio risk (positive).

The Funding, Liquidity & Coverage score has been assigned below the implied score due to the following adjustment reason(s): Funding flexibility (negative).

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.