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Fitch Completes BDC Industry Peer Review; Upgrades ACAS & Revises Outlooks

  Fitch Completes BDC Industry Peer Review; Upgrades ACAS & Revises Outlooks

Business Wire

NEW YORK -- May 6, 2013

Fitch Ratings has completed a peer review of seven rated Business Development
Companies (BDCs) in concert with its publication of an industry report, titled
'Business Development Companies - A Comparative Analysis: 2012', which is
available on Fitch's website.

Based on this review, Fitch has upgraded the long-term Issuer Default Rating
(IDR) of American Capital, Ltd. (ACAS) to 'BB-' from 'B+' and affirmed the
long-term IDRs of Apollo Investment Corporation (Apollo), Ares Capital
Corporation (Ares), BlackRock Kelso Capital Corporation (BKCC), Fifth Street
Finance Corp. (FSC), PennantPark Investment Corporation (PNNT), and Solar
Capital, Ltd (Solar). The IDRs of the all of the affirmed BDCs are in the
'BBB' rating category. A full list of rating actions is provided at the end of
this release.

Concurrently, the Rating Outlook for Ares has been revised to Positive from
Stable, and the Rating Outlook for Apollo has been revised to Stable from
Negative. The Rating Outlooks for the remaining BDCs are Stable.

KEY RATING DRIVERS

The upgrade of ACAS' ratings reflect its improved operating performance,
driven by increased income from asset management strategies, reduced leverage,
its ability to refinance the capital structure through the issuance of secured
term debt, and the stronger liquidity profile, given the addition of bank
revolver capacity.

The rating affirmations of the six other BDCs reflect relative stability in
core operating performance, stronger asset quality metrics, improved funding
flexibility, and the maintenance of leverage levels at-or-below management's
targeted range. Portfolio growth continues to slow as firms mature and gain
scale and because refinancing activity has remained strong given the low
interest rate environment. BDCs, in general, remain more focused on senior
positions in the capital structure, particularly as competition has increased,
underlying portfolio company leverage has ticked-up, and risk-adjusted returns
have declined in certain parts of the market.

Valuation volatility remains, but quarterly movements have been much more
modest for the majority of the peer group, and most experienced unrealized
appreciation in 2012. On average, investment portfolios were marked 2.2% below
their cost basis at Dec. 31, 2012, compared to 7.5% below cost at Dec. 31,
2011.

Net realized losses on portfolio investments have been meaningful since the
start of the crisis, as BDCs dealt with non-accruals, recognized declines in
value, participated in portfolio company recapitalizations, or exited
underperforming investments in an effort to redeploy proceeds into
higher-yielding securities. Portfolio losses did decline in 2012, but remained
significant, aggregating to $422.3 million for the fiscal year. Over time,
Fitch does not expect realized gains and losses to be a meaningful component
of net income, given declines in portfolio equity holdings and improvements in
asset quality.

Funding flexibility improved significantly in recent quarters, with most BDCs
accessing the unsecured debt markets via the issuance of convertible notes
and/or retail notes. In 2012 and 1Q13, unsecured issuance amounted to $1.9
billion across six rated BDCs, compared to $545 million of unsecured issuance
across three rated issuers in 2011. Fitch views an unsecured funding component
favorably as it provides funding diversity, as well as flexibility to encumber
assets if necessary for liquidity purposes. Debt maturity profiles have also
improved, and ACAS is the only issuer with a maturity in 2013 or 2014, given
the amortization of its secured term loan.

Access to the public equity markets was also strong in 2012, as improved
operating performance and valuation trends pushed share prices back above net
asset values during the year. Issuance volume amounted to approximately $1.3
billion in 2012; up over 300% from the prior year. Growing equity bases have
kept leverage levels below internal targets and have provided ample liquidity
coffers for investment purposes. BDCs are expected to continue to access the
markets opportunistically for growth capital.

Average BDC leverage, as measured by par debt divided by equity, amounted to
0.50 times (x) at Dec. 31, 2012 compared to 0.56x the year before. Fitch
believes leverage levels could rise modestly in 2013 as BDCs draw on revolver
capacity for portfolio investment, but Fitch expects portfolio growth rates to
decline this year as risk spreads tighten in an overheating market. Fitch
believes many BDCs will be focused on refinancing, and potentially
re-levering, existing portfolio companies which they know well, or looking for
more complex transactions that involve specific industry knowledge, additional
time to originate and/or unique structuring.

Portfolio concentrations ticked-up modestly in 2012, despite declines in
leverage, as some underperforming debt investments were restructured into
equity positions. Top 10 investments averaged 64.5% of equity at Dec. 31,
2012, but would be 52.2% if Fitch were to adjust for ACAS' investment in
American Capital Asset Management, LLC and European Capital Limited, Ares'
investment in the Senior Secured Loan Fund LLC, and Solar's investment in
Crystal Capital Financial Holdings LLC, each of which is itself a diversified
portfolio of loans. Fitch believes portfolio diversity is critical, as the
underperformance of one or more large investments can have an outsized impact
on leverage. As a result, BDCs with higher concentrations as a percent of book
equity are expected to manage leverage more conservatively, all else equal.

Another point of focus for Fitch is net investment coverage of dividends,
given the regulatory requirement that BDCs distribute 90% of taxable income on
an annual basis. Dividend coverage improved modestly in 2012, given relatively
stable dividends and stronger operating performance, however, cash income
coverage remains somewhat weaker due to the accrual of paid-in-kind interest
and non-cash dividends. Fitch would view core cash earnings coverage at or
near 100% on a consistent basis favorably.

RATING SENSITIVITIES

Fitch believes positive rating momentum for the industry is limited to the
'BBB' category given the relative illiquidity of portfolio investments, more
limited funding flexibility than other investment grade rated issuers, an
inability for BDCs to retain capital due to distribution requirements, and the
impact that fair value accounting has on leverage. However, negative rating
action for any one issuer could be driven by deterioration in asset quality or
core operating performance, increases in portfolio concentrations or equity
holdings without commensurate reductions in leverage, weakening cash income
coverage of dividends, and/or the recognition of sizeable realized losses or
unrealized portfolio depreciation which forces leverage above management
targets for extended periods or reduces cushions on debt covenants.

For Solar, in particular, a meaningful increase in leverage could result in
negative rating action because its investment portfolio concentrations and
equity exposures are higher than the peer average. Fitch believes these
factors could contribute to more valuation volatility and an outsized impact
on leverage, particularly at elevated levels.

The Outlook revision for Apollo reflects its relatively stable core operating
performance in the past year following changes in senior management that
occurred in early 2012, as well as the corresponding shift in strategy from
large mezzanine loans to more traditional middle market senior positions. As
part of this change, the portfolio mix has shifted as the proportion of
secured debt has increased over the last year, closer to a more equal
weighting between secured and subordinated debt, at 40% and 48% of the
portfolio, respectively, at Dec. 31, 2012. Apollo also sought to improve its
funding flexibility in 2012 by issuing $150 million of unsecured retail notes,
thus increasing its proportion of unsecured funding to 33.6% of total debt.
The firm also received a $50 million equity investment from a subsidiary of
affiliate Apollo Global Management, LLC, which Fitch believes demonstrates a
strong commitment to the vehicle from the large asset manager, which serves as
the BDC's investment advisor.

The Positive Outlook assigned to Ares' ratings reflects peer-superior funding
flexibility, operating consistency throughout the recent downturn, a strong
liquidity profile, and conservative dividend strategy. At Dec. 31, 2012, 86.3%
of the company's debt was considered unsecured, borrowing capacity on the
revolving facilities was $1.6 billion, and net investment income coverage of
the dividend was 104.7% for the year, when adjusting for $0.10 of special
dividends paid per share and the accrual of part II incentive fees not
currently payable in cash. Additionally, the firm has approximately $0.96 per
share of spillover income, which Fitch believes will support dividend
consistency in coming quarters.

The rating could potentially be upgraded over the next 18-24 months provided
the company demonstrates measured portfolio growth in the face of what Fitch
believes is an overheating credit environment. This will be evaluated in the
context of the stability and consistency of Ares' operating performance, asset
quality, valuation, and underlying portfolio metrics, including leverage and
interest coverage. Specifically, up-ticks in underlying portfolio leverage,
and/or deterioration in portfolio company interest coverage or overall
portfolio yields, could signal the potential for asset quality issues down the
road, which would likely lead to an Outlook revision.

Although additional upward rating momentum is not envisioned in the near to
medium term, potential upward momentum for ACAS will be driven by its ability
to improve funding flexibility, as it is the only rated BDC with a fully
secured funding profile and it does not have ready access to the equity
markets as its share price continues to trade at a discount to net asset
value. Still, Fitch recognizes that ACAS has the ability to retain capital as
it is not currently required to distribute taxable income since it converted
to a C corporation. Positive rating action could also result from stronger
asset quality trends and a decline in the proportion of equity investments in
the portfolio, which yield more valuation volatility, particularly in periods
of stress. That said, ACAS' leverage is currently well below the peer average,
which does provide for some cushion against valuation declines. Lastly, Fitch
will monitor ACAS' on-going movement towards increased management revenues as
opposed to traditional balance sheet investments.

Fitch has upgraded the following ratings:

American Capital, Ltd.

--Long-term IDR to 'BB-' from 'B+';

--Secured debt to 'BB+' from 'BB/RR1'.

Fitch has affirmed the following ratings:

Apollo Investment Corporation

--Long-term IDR at 'BBB';

--Secured debt at 'BBB';

--Unsecured debt at 'BBB-'.

Ares Capital Corporation

--Long-term IDR at 'BBB';

--Secured debt at 'BBB';

--Unsecured debt at 'BBB'.

Allied Capital Corporation

--Unsecured debt at 'BBB'.

BlackRock Kelso Capital Corporation

--Long-term IDR at 'BBB-';

--Secured debt at 'BBB-';

--Unsecured debt at 'BBB-'.

Fifth Street Finance Corp.

--Long-term IDR at 'BBB-';

--Secured debt at 'BBB-';

--Unsecured debt at 'BBB-'.

PennantPark Investment Corporation

--Long-term IDR at 'BBB-';

--Secured debt at 'BBB-';

--Unsecured debt at 'BBB-'.

Solar Capital, Ltd.

--Long-term IDR at 'BBB-';

--Secured debt at 'BBB-';

--Unsecured debt at 'BBB-'.

The Rating Outlook for Ares is Positive. The Rating Outlooks for ACAS, Apollo,
BKCC, FSC, PNNT, and Solar are Stable.

Additional information is available at 'www.fitchratings.com.'

Applicable Criteria and Related Research:

--'Global Financial Institutions Rating Criteria' (Aug. 15, 2012);

--'Investment Manager and Alternative Funds Criteria' (Dec. 17, 2012).

Applicable Criteria and Related Research

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686181

Investment Manager and Alternative Funds Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696673

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=790489

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS.
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK:
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DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S
PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND
METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF
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OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN
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ON THE FITCH WEBSITE.

Contact:

Fitch Ratings
Primary Analyst - Ares
Secondary Analyst - BKCC, FSC, PNNT, Solar
Meghan Neenan, CFA, +1 212-908-9121
Senior Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Primary Analyst - BKCC, FSC
Secondary Analyst - ACAS, Apollo, Ares
Katherine Hughes, +1 312-368-3123
Associate Director
or
Primary Analyst - ACAS, Apollo, Solar
Paul Ryndak, CFA, +1 312-368-3194
Director
or
Primary Analyst - PNNT
Mohak Rao, CFA, +1 212-908-0559
Director
or
Committee Chairperson
Nathan Flanders, +1 212-908-0827
Managing Director
or
Media Relations:
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com