Fitch Ratings completed its periodic review of Business Development Companies (BDCs), which comprises ten publicly rated firms. The following actions were taken as a result of the peer review:

• American Capital, Ltd.'s ratings were placed on Rating Watch Negative.
• Apollo Investment Corporation's Long-term Issuer Default Rating (IDR) was downgraded to 'BBB-' from 'BBB'. The Rating Outlook is Negative.
• Ares Capital Corporation's Long-term IDR was affirmed at 'BBB'. The Rating Outlook is Stable.
• BlackRock Capital Investment Corporation's Long-term IDR was affirmed at 'BBB-'. The Rating Outlook is Negative.
• Corporate Capital Trust, Inc.'s Long-term IDR was affirmed at 'BB+'. The Rating Outlook is Stable.
• Fifth Street Finance Corp.'s Long-term IDR was downgraded to 'BB' from 'BB+'. The Rating Outlook is Negative.
• FS Investment Corporation's Long-term IDR was affirmed at 'BBB-'. The Rating Outlook is Stable.
• PennantPark Investment Corporation's Long-term IDR was affirmed at 'BBB-'. The Rating Outlook was revised to Negative from Stable.
• Solar Capital Ltd.'s Long-term IDR was affirmed at 'BBB-'. The Rating Outlook was revised to Stable from Negative.
• TPG Specialty Lending, Inc.'s Long-term IDR was affirmed at 'BBB-'. The Rating Outlook is Stable.

Fitch has published Rating Action Commentaries for each of the BDCs, which are available on www.fitchratings.com.

Fitch's outlook for the BDC sector is negative and reflects competitive underwriting conditions, earnings pressure, underperforming energy investments, unsustainable asset quality metrics, increased activist pressure, and limited access to growth capital. While some firms are better positioned, given their more conservative financial profiles and portfolio characteristics, others are likely to see rating pressure over the outlook horizon.

BDCs are heavily dependent on the equity markets to fund portfolio growth, but access to the market has been almost non-existent over the last 18 months as share prices continue to trade at steep discounts to net asset value (NAV). At March 7, 2016, rated BDCs were trading at an 18.3% average discount to NAV, thus preventing most from issuing stock without significantly diluting existing shareholders. While the reduction in portfolio growth is viewed favorably by Fitch, given tough underwriting conditions, some firms may struggle to close the trading gap, leaving them at a competitive disadvantage if and when investment opportunities arise.

The decline in commodity prices has yielded the first notable crack in asset quality performance for BDCs. More broadly, asset quality metrics remain at unsustainably low levels, in Fitch's opinion. While strong portfolio company performance has been supported by an improving economic environment, low interest rates are likely masking some potential underlying company-specific issues, as issuers have been able to refinance themselves out of trouble rather easily in recent years. Fitch believes asset quality metrics are likely to deteriorate over the near term; however, the pace of deterioration will be somewhat dependent upon the rate of change in interest rates, the backdrop of the broader economic environment, differing sector exposures, and the integrity of individual firms' underwriting.

Fitch has not observed a marked increase in leverage levels for the sector, with average leverage for investment grade-rated BDCs of approximately 0.74x at year-end 2015 compared to 0.60x at year-end 2014. However, there is a wide dispersion of leverage around the average, and those with the most energy exposure often also have the highest leverage ratios. Share repurchase activity has also increased in the sector in recent quarters, which could inflate leverage ratios further. Fitch believes that BDCs heavily focused on maximizing leverage further. Fitch believes that BDCs heavily focused on maximizing leverage run the risk of having less dry powder to deploy if and when underwriting conditions improve, thus weakening earnings upside.