A major credit rating agency has shifted its outlook for a Goldman Sachs private lending fund to negative, expressing concerns about the fund’s financial stability.
Fitch Ratings announced Friday after market close that it changed the outlook for Goldman Sachs BDC while keeping the fund’s current lower-investment grade rating unchanged. However, the agency warned it could lower the rating further if the fund fails to strengthen its asset protection buffer.
“Fitch believes the asset coverage cushion is low given GSBD’s elevated risk profile as evidenced by recent credit deterioration in the portfolio,” the rating agency’s analysts stated.
Market watchers have been scrutinizing Goldman Sachs BDC and similar private lending funds called business development companies, which provide loans to mid-sized businesses. These funds face new pressures as artificial intelligence advances pose risks to software companies’ business operations.
The Goldman Sachs fund disclosed troubling trends in its latest quarterly report on May 8. The percentage of loans where borrowers have fallen significantly behind on payments climbed to 4.7% at amortized cost, up from 2.8% in the prior quarter.
Additionally, approximately 10% of the fund’s total interest and dividend earnings in the first quarter came from “payment-in-kind” arrangements, where borrowers can defer cash interest payments by adding them to the loan balance due at maturity.
“This elevated exposure could increase the risk of realized losses if portfolio companies ultimately default,” Fitch’s analysts observed.
Goldman Sachs responded to the rating agency’s announcement by emphasizing that Goldman Sachs BDC accounts for slightly more than 1.5% of the company’s total private credit assets under management.
The firm noted that 58% of the fund’s loan portfolio was originated after the current management team assumed control in March 2022.
The remaining 42% represents “older positions that reflect the majority of current credit volatility — accounting for over 99.5% of our total non-accruals at cost,” explained Vivek Bantwal, global co-head of private credit for Goldman Sachs Asset Management.
Bantwal added that the fund’s internal restructuring teams are “deeply engaged with these borrowers to maximize recovery.”
Fitch observed that Goldman Sachs BDC’s debt levels rose during the first quarter, which it linked to unrealized losses on loans in the portfolio.
“We are comfortable with the leverage level at quarter end due to our visibility into near term repayments,” Bantwal responded.
