Fitch Ratings announced on Friday that it has shifted the outlook for Goldman Sachs BDC to negative, though it kept the fund's existing lower-investment-grade rating unchanged. The ratings agency warned the fund could face a downgrade unless it bolsters its asset coverage cushion.
In its post-market statement, Fitch said it views the asset coverage buffer as low relative to the elevated risk profile of the business development company - a view the agency tied to recent credit deterioration within the fund's portfolio.
Investors have been scrutinizing Goldman Sachs BDC and peer private credit vehicles that operate as BDCs and lend to middle-market companies. That attention has intensified amid concerns about the impact of advances in artificial intelligence on the business models of certain software-sector firms.
Goldman Sachs BDC disclosed an increase in its loan portfolio's non-accrual rate in its first-quarter earnings release on May 8. The fund said the non-accrual rate at amortized cost rose to 4.7% in the quarter from 2.8% in the prior quarter. The firm also reported that roughly 10% of its total interest and dividend income in the first quarter came from payment-in-kind income, which permits borrowers to add interest to the loan principal rather than make cash interest payments.
"This elevated exposure could increase the risk of realized losses if portfolio companies ultimately default," Fitch analysts wrote.
Goldman Sachs responded in writing to the ratings action by noting that Goldman Sachs BDC accounts for just over 1.5% of the firm's total private credit assets under management. The firm said 58% of the BDC's portfolio consists of loans originated since the current management team assumed control in March 2022.
The remaining 42% are older positions, which Goldman Sachs says represent the bulk of current credit volatility. Vivek Bantwal, global co-head of private credit for Goldman Sachs Asset Management, said those older loans account for over 99.5% of the fund's total non-accruals at cost. He added that the firm's internal workout teams are deeply engaged with affected borrowers to maximize recovery.
Fitch also pointed out that Goldman Sachs BDC's leverage rose during the first quarter, a change the ratings agency associated with unrealized write-downs in the loan portfolio. In reply, Bantwal said the firm was comfortable with the quarter-end leverage level because it had visibility into near-term repayments.
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Key context and details in this development include the ratings outlook shift by Fitch, the fund's reported increases in non-accruals and payment-in-kind income, and Goldman Sachs' characterization of the portfolio split between newer loans under current management and older loans that drive most of the credit volatility. Fitch's concerns center on the thin asset coverage cushion and how that may expose the fund to downside if losses materialize.