Fitch Rates Solar Capital Ltd's Unsecured Notes 'BBB-'

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has assigned a rating of 'BBB-' to Solar Capital Ltd's (Solar) unsecured institutional debt issuance. Fitch does not expect there to be a material impact on the company's leverage levels as a result of the issuance, as proceeds will be used to repay borrowings on the secured credit facility, fund new portfolio investments and for general corporate purposes. That said, Fitch views the firm's ability to access the institutional bond market on an unsecured basis and extend its debt maturity profile favorably, as it provides Solar with enhanced funding flexibility.

KEY RATING DRIVERS

SENIOR DEBT

The rating is equalized with the ratings assigned to Solar's existing senior unsecured debt as the new notes will rank equally in the capital structure. The equalization of the unsecured ratings with Solar's Issuer Default Rating (IDR) reflects the expectation of average recovery prospects for the instrument and Fitch's expectation that proceeds from the issuance will be used to repay a portion of secured debt outstanding, thus increasing the amount of unsecured funding in the capital structure to 34% on a pro forma basis, based on Sept. 30, 2016 debt balances.

Solar's IDR reflects its low balance-sheet leverage, focus on senior debt investments, sound liquidity, minimal portfolio energy exposure, low non-cash income, prudent dividend management and a demonstrated willingness to moderate portfolio growth and move the investment capital structure into more senior positions in a highly competitive underwriting environment. Solar's measured growth and low leverage relative to its long-term operating target have also left it well-positioned to capitalize on investment opportunities at a time when many of its business development company (BDC) peers are more capital constrained, which Fitch views as a strength.

Rating constraints for the BDC sector include the capital markets impact on leverage, given the need to 'fair value' the portfolio each quarter, dependence on the capital markets to fund portfolio growth, and a limited ability to retain capital due to dividend distribution requirements. Rating constraints for Solar, more specifically, include weaker-than-peer asset quality performance since inception, although this has improved more recently, and higher relative exposure to non-qualifying assets, which were 28.4% of the portfolio at Sept. 30, 2016.

The Stable Outlook reflects the firm's low leverage and strong dividend coverage, which, in Fitch's opinion, provide Solar with additional financial flexibility to weather the current challenging operating environment for BDCs, while also potentially capitalizing on investment opportunities.

RATING SENSITIVITIES

SENIOR DEBT

Senior debt ratings are primarily linked to changes in the Long-Term IDR, but are also sensitive to changes in recovery prospects for the debt class.

Negative rating momentum for Solar could develop from a material alteration of the portfolio risk profile, asset quality deterioration, declines in operating performance and dividend coverage, a reduction in funding flexibility, impairment of the liquidity profile, and/or an increase in firm leverage above the targeted range, with consideration given to the consolidated leverage of Crystal Financial LLC and the firm's senior secured loan program (SSLP).

Upward rating momentum is viewed as limited over the outlook horizon given challenging sector fundamentals, but could develop over the long term with strong credit performance of recent vintages, improved earnings consistency, enhanced funding flexibility, strong dividend coverage, and proven performance of the SSLP.

Headquartered in New York, NY, Solar is an externally managed BDC, founded in November 2007, and completed an initial public offering in February 2010. As of Sept. 30, 2016, the company had investments in 66 portfolio companies amounting to approximately $1.4 billion.

Fitch assigns the following rating:

Solar Capital Ltd.

-- Senior unsecured debt at 'BBB-'.

Existing ratings for Solar are as follows:

Solar Capital Ltd.

--Long-Term IDR of 'BBB-';

--Senior secured debt of 'BBB-';

--Senior unsecured debt of 'BBB-'.

The Rating Outlook is Stable.

Additional information is available on www.fitchratings.com

Applicable Criteria

Global Non-Bank Financial Institutions Rating Criteria (pub. 15 Jul 2016)

https://www.fitchratings.com/site/re/884128

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1014600

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014600

Endorsement Policy

https://www.fitchratings.com/regulatory

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View source version on businesswire.com: http://www.businesswire.com/news/home/20161110005945/en/

Fitch Ratings
Primary Analyst
Johann Juan
Director
+1-312-368-3339
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Meghan Neenan, CFA
Senior Director
+1-212-908-9121
or
Committee Chairperson
Julie Solar
Senior Director
+1-312-368-5472
or
Media Relations:
Hannah James, New York, + 1 646-582-4947
Email: [email protected]

Source: Fitch Ratings

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