By Matt Tracy
WASHINGTON, May 15 (Reuters) – Fitch Ratings has changed its ratings outlook to negative for Goldman Sachs’ private credit fund, Goldman Sachs BDC, the ratings agency said on Friday.
In its post-market close announcement, Fitch maintained its current lower-investment grade rating of Goldman Sachs BDC but could downgrade the fund if it doesn’t increase its asset cushion.
“Fitch believes the asset coverage cushion is low given GSBD’s elevated risk profile as evidenced by recent credit deterioration in the portfolio,” Fitch analysts wrote.
Investors have taken a closer look at Goldman Sachs BDC and other private credit funds known as business development companies (BDCs) that lend to middle-market companies, as advances in artificial intelligence threaten the business models of certain companies in the software sector.
Goldman Sachs BDC saw an uptick in its loan portfolio’s non-accrual rate, or the percentage of its loan holdings that are well behind on payments, the fund said in its first quarter earnings on May 8, noting a rise to 4.7% at amortized cost from 2.8% in its previous quarter.
The fund also reported roughly 10% of its total interest and dividend income in the first quarter came from “payment-in-kind” income, which allows borrowers to “pay” interest by adding it to the principal due at the loan’s maturity rather than cash.
“This elevated exposure could increase the risk of realized losses if portfolio companies ultimately default,” Fitch analysts noted.
In a written response to Fitch’s announcement, Goldman Sachs highlighted that Goldman Sachs BDC represented just over 1.5% of the firm’s overall private credit assets under management.
About 58% of the BDC’s portfolio consists of loans made since the fund’s current management team took over in March 2022, it said.
The remaining 42% of loans are “older positions that reflect the majority of current credit volatility – accounting for over 99.5% of our total non-accruals at cost,” said Vivek Bantwal, global co-head of private credit for Goldman Sachs Asset Management.
The fund’s internal workout teams are “deeply engaged with these borrowers to maximize recovery,” Bantwal added.
Fitch noted Goldman Sachs BDC’s leverage increased during the first quarter, a move it attributed to unrealized write-downs within its loan portfolio.
“We are comfortable with the leverage level at quarter end due to our visibility into near term repayments,” Bantwal noted.
(Reporting by Matt Tracy in Washington; Editing by Cynthia Osterman)
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