Fitch Affirms Main Street Capital at 'BBB-'; Outlook Stable

Published: 2025-07-01 05:00:22 ET MAIN

Published on 07/01/2025 at 05:00

Fitch Ratings has affirmed Main Street Capital Corporation's (Main Street) Long-Term Issuer Default Rating (IDR) and unsecured debt rating at 'BBB-' as well as its 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

Senior Portfolio Focus: The ratings affirmation reflects Main Street's portfolio focus on senior debt investments, strong portfolio diversification, solid track record in credit and equity investing, above-average asset coverage cushion, consistent operating performance, strong funding flexibility with demonstrated access to the public debt and equity markets.

Elevated Equity Exposure: Rating constraints specific to Main Street include above-average exposure to equity investments, which could yield more valuation volatility over time, and a focus on lower middle market (LMM) companies with below-average EBITDA, which could increase portfolio risk in an economic downturn. Main Street's historical credit performance and underwriting track record have been strong, although non-accrual levels have been elevated more recently. Fitch believes Main Street's lack of affiliation with a broader investment platform could be a headwind longer term 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.

Differentiated Lower Middle Market Strategy: Main Street's $5.1 billion investment portfolio at 1Q25 was comprised of 65% first lien debt investments and 34% preferred and common equity positions. Exposure to preferred and common equity investments was much higher than the rated peer average of 9% and is primarily the result of the firm's LMM strategy which includes equity co-investments in all deals. Fitch believes these equity investments could result in more valuation volatility over time; however, Main Street has a solid track record in the LMM, generating $120.3 million of cumulative net realized gains since its IPO in 2007.

Solid Portfolio Diversity: The average EBITDA of Main Street's portfolio is below the peer average, but the firm has solid portfolio diversity. At 1Q25, Main Street had 189 portfolio companies with an average investment size of $21.9 million. Main Street's top 10 investments represented 24% of total assets and 44% of net assets, which was in line with the rated peer average.

Elevated Non-Accruals: While non-accrual levels run higher than other rated BDCs, Main Street's historical realized loss experience has been better than the peer average. Annualized net realized losses were 2.4% of the beginning portfolio at fair value in 1Q25 compared to 1.1% of realized gains in 2024 and average annualized losses of 0.1% between 2021 and 2024. There were 18 portfolio companies on non-accrual at 1Q25, representing 5.6% of the debt portfolio at cost and 2.6% at fair value, which was above the peer average and could translate into additional portfolio losses. Fitch believes Main Street's exposure to tariff affected sectors such as machinery, industrials, automotive components and others is higher than peers and may increase amendment activity or drive higher non-accrual levels in the medium term.

Above Average Earnings: The portfolio's net investment income (NII) yield was 7.7% annualized in 1Q25, down from 8.1% in 2024 but well above the rated peer average of 5.5%.Fitch attributes this to Main Street's investment strategy and focus on LMM companies, which offer a higher yield, and the internally managed model that offers more cost efficiency relative to most externally managed BDCs. Main Street's growing asset management business provides additional fee income while leveraging its existing infrastructure.

Solid Asset Coverage Cushion: Leverage, as measured by par debt-to-equity, was 0.8x at 1Q25. Excluding Small Business Administration (SBA) borrowings, Main Street's statutory leverage of 0.7x was below the firm's targeted range of 0.8x-0.9x. Leverage at 1Q25 implied an asset coverage cushion of 39.6%, which was well-above the peer average of 26% and within Fitch's 'a' category benchmark range of 33%-60%. Fitch expects the firm to continue operating with an asset coverage cushion above 25% over time, given the risk profile of the portfolio.

Solid Funding Flexibility and Liquidity: At 1Q25, unsecured debt represented 62% of total debt, which was above the peer average of 49%. Fitch expects Main Street to remain opportunistic with unsecured issuance and expects its unsecured funding mix to remain above 35%.

At 1Q25, Main Street had solid liquidity, consisting of $109 million of cash and $1.2 billion of aggregate undrawn capacity on its secured credit facilities. This covers outstanding unfunded commitments, which amounted to $265 million at 1Q25, as well as the $150 million of unsecured debt maturing in December 2025.

NII coverage of base dividends was solid at 124% in 1Q25 and averaged 117% from 2021-2024. Fitch believes Main Street's $425 million of undistributed earnings 1Q25 also provides a degree of cushion to dividend stability through market cycles. Payment-in-kind income as a percentage of interest and dividend income was 3.5% in 1Q25, and averaged 3.2% between 2021 and 2024, well below the rated peer average.

Stable Outlook: The Stable Outlook reflects Fitch's expectations for a relatively consistent portfolio mix, consistent core earnings generation, and the maintenance of the asset coverage cushion at-or-above 25% and the unsecured funding mix 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%; a significant increase in second lien and/or equity and preferred equity investments, without a commensurate increase in the asset coverage cushion; a meaningful increase in realized or unrealized losses; a sustained decline in unsecured funding below 35% of total debt; deterioration in cash earnings coverage of the dividend, or an impairment of the firm's liquidity profile could also yield negative rating action.

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

Strong and differentiated credit performance, in combination with the consistency of Main Street's investment valuations and underlying portfolio metrics would be positive for ratings. 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, the maintenance of strong funding flexibility, ample liquidity, solid dividend coverage and consistent core operating performance would also be required to yield positive rating actions.

DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS

The senior secured debt rating of 'BBB' is one-notch above Main Streets Long-Term IDR and 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 since Main Street is subject to a 150% regulatory asset coverage requirement.

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. However, the notching could change if there is a shift in the funding mix or reduction in available asset coverage, which Fitch believes affects 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 Capitalization & Leverage score has been assigned below the implied score due to the following adjustment reason: Historical and future metrics (negative).

The Funding, Liquidity & Coverage score has been assigned below the implied score due to the following adjustment 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.