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

Published: 2025-07-01 05:00:21 ET FDUS

Published on 07/01/2025 at 05:00

Fitch Ratings has affirmed Fidus Investment Corporation's (FDUS) Long-Term Issuer Default Rating (IDR) at 'BBB-'.

The Rating Outlook is Stable. Fitch also affirmed FDUS's secured revolving credit facility at 'BBB' and unsecured debt issuances at 'BBB-'.

Today's ratings actions have been taken as part of a broader review of a group of business development companies (BDCs), which include 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

Sound Portfolio Profile: FDUS's ratings reflect the senior focus of its investment portfolio, above average asset coverage cushion, solid asset quality track record, consistent operating performance, solid funding flexibility with demonstrated access to the public debt markets, and experienced management team.

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. FDUS's rating is also constrained by material upcoming unsecured debt maturities next year.

Lower Middle Market Investment Focus: The average EBITDA of FDUS's portfolio is below the peer average due to its focus on lower middle market (LMM) investments. Fitch believes this could increase portfolio risk in an economic downturn. However, the firm has adequate portfolio diversity, limiting the impact of credit deterioration in any one portfolio company.

Increasingly Senior Portfolio: FDUS focuses on senior secured debt investments, making up 77% of the total portfolio at fair value at 1Q25. This remains below the rated peer average of 85.5%, but is up from 73.3% a year ago. Fitch views FDUS's largely senior secured portfolio favorably and expects the portion of senior secured debt investments to migrate towards the peer average as future originations target senior secured investments.

Solid Asset Quality: FDUS's asset quality has been strong historically, with average net realized gains of 4.9% of the average portfolio at fair value from 2021-2024. This compared favorably to the rated peer average and was within Fitch's 'a' category asset quality benchmark range of 2%-5% for business development companies (BDCs). As of 1Q25, non-accruals made up 0.9% and 4.2% of the portfolio on a fair value and cost basis, respectively. The former is in line with rated peers, while the latter is elevated compared to the peer average.

Consistent Earnings: FDUS's core earnings have been stable and consistently above the peer average due to its focus on investing in LMM companies, which generate higher yields. FDUS's annualized net investment income (NII) yield was 6.8% in 1Q25, in line with long-term performance but below highs in 2023 and 2024, of 7.6% and 7.5%, respectively. Fitch believes NII could face additional pressure throughout 2025 from rising non-accruals, potential rate cuts and spread compression.

Asset Coverage Cushion Superior to Peers: Leverage, measured by par debt to equity, was 0.81x as of 1Q25, in line with its historical average. Excluding SBA borrowings, regulatory leverage was 0.54x, implying an asset coverage cushion of 47.5%, well-above the rated peer average and within Fitch's 'a' category capitalization and leverage benchmark range. Fitch expects FDUS to operate with a higher cushion than peers considering the risk profile of the portfolio.

Solid Funding Flexibility: Unsecured debt represented 64.1% of FDUS's total debt as of 1Q25, falling within Fitch's 'bbb' category benchmark range of 35%-100% for BDCs. Fitch believes the firm's funding mix provides it with solid funding flexibility and expects FDUS will continue to access the unsecured debt markets to manage its debt maturity profile, including to replace two unsecured issuances totaling $250 million maturing in 2026, and maintain at least a 35% unsecured portion of total debt.

Above-Average Dividend Coverage: FDUS has maintained strong dividend coverage since its inception. NII coverage of dividends declared was 122.8% in 1Q25, compared with a four-year average of 138.3% for 2021-2024. Cash NII coverage, adjusted for non-cash income and expenses, was also strong, at 108.3% in 1Q25. FDUS is above the rated peer average on both measures. PIK income has increased in recent years, but stabilized at 6.5% of interest and dividend income in 1Q25, which is below the rated peer average. Fitch views growth in PIK income with caution amid the more challenging economic backdrop.

Stable Outlook: The Stable Outlook reflects Fitch's expectation for a continued focus on senior secured debt investments, consistent core earnings generation, solid, albeit modestly deteriorating, asset quality, and the maintenance of the asset coverage cushion at or above 25% and the unsecured funding mix at or above 35%.

RATING SENSITIVITIES

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

A sustained reduction in the asset coverage cushion below 25%;

Deterioration in the portfolio risk profile, such that first lien positions decline materially as a proportion of the overall portfolio without a commensurate decrease in leverage would be negative for ratings;

Deterioration in operating consistency, a material increase in non-accrual levels, meaningful realized or unrealized losses;

Deterioration of the cash earnings coverage of the dividend, an impairment of the firm's liquidity profile; and/or

A sustained decline in unsecured funding below 35% of total debt.

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

Strong and differentiated asset quality performance of recent vintages over time and an increase in the asset coverage cushion to at least 33% on a sustained basis, assuming no change in the origination strategy, or absent that, a meaningful reduction in perceived portfolio risk would be positive for ratings;

The maintenance of strong credit performance, funding flexibility, ample liquidity, solid dividend coverage and consistent core operating performance would also be necessary to yield a positive rating action.

DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS

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

The senior unsecured debt rating is equalized with the Long-Term IDR and reflects solid collateral coverage, given that FDUS is subject to a 150% asset coverage rule. The unsecured debt rating also reflects Fitch's expectation that unsecured debt, as a proportion of FDUS's total funding, will remain within-or-above the 'bbb' category range.

DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES

The senior secured and unsecured debt ratings are primarily linked to FDUS's Long-Term IDR and are expected by Fitch to move in tandem. However, a sustained reduction in unsecured debt as a proportion of total debt could result in the unsecured debt rating being notched down from the IDR.

ADJUSTMENTS

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

The Business Profile score has been assigned below the implied score due to the following adjustment reason: business model (negative).

The Asset Quality score has been assigned below the implied score due to the following adjustment reason: risk profile and business model (negative).

The Capitalization and Leverage score has been assigned below the implied score due to the following adjustment reason: risk profile and business model (negative).

The Funding, Liquidity and Coverage score has been assigned below the implied score due to the following reason: 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.