KBRA Affirms Ratings for MSC Income Fund, Inc.

KBRA affirms the BBB- issuer and senior unsecured debt ratings for MSC Income Fund, Inc. (NYSE: MSIF or “the company”). The rating Outlook is Stable.

Key Credit Considerations

The ratings are supported by MSIF’s well diversified $1.2 billion investment portfolio spread among 153 portfolio companies (including equity investments) across 30+ industries as of 2Q25, with a ~77% at fair value (FV) portfolio consisting of senior secured first lien loans. The top three portfolio sectors are Electrical Equipment (7.8%), Commercial Services & Supplies (7.4%), and Machinery (7.4%), indicating a highly granular portfolio. Historically, MSIF invested primarily into the comparatively less competitive lower middle market but has shifted the portfolio to more exposure to Private Loan investments, which are typically slightly larger, and to companies owned/being acquired by a private equity fund. We expect this dynamic to continue as management changed the company’s investment strategy to be solely focused on Private Loan investments when it completed the listing of its common stock on the New York Stock Exchange and the follow on offering in January 2025, raising just over $90 million in new equity.

MSIF maintains SEC exemptive relief to co-invest with Main Street Capital Corp. (NYSE: MAIN), the owner of MSIF's adviser, and MAIN's affiliates with 100% of the investment portfolio overlapped with MAIN as of 2Q25. MSIF’s solid management team has a long track record working within the private credit markets having been together for 20+ years. The MAIN platform provides a 25+ year history of strong credit performance through economic cycles.

The company's leverage ratio of 0.75x is low relative to peers due to its more restrictive regulatory minimum asset coverage of 200%, which is in place until January 2026 when it will be decreased to 150%; therefore, we expect leverage to trend up as the more restrictive asset coverage requirement rolls off and the company’s asset growth potentially outstrips the company's equity capital growth. This is consistent with management's expected target ratio of 1.15x-1.25x after the regulatory coverage decrease. We view this as reasonable, particularly as the senior secured, first lien focused Private Loan investment book grows in proportion to the overall balance sheet.

MSIF’s funding profile has become more diversified over time and is comprised of a secured revolving bank facility, an SPV asset facility, and one issue of senior unsecured notes. As of 2Q25, the ratio of unsecured debt to total debt was ~28%, which is relatively lower than higher rated peers reflecting a highly secured funding profile. As of 2Q25, the company had adequate liquidity of $156 million in available credit lines and $28.3 million of cash set against $77 million of unfunded commitments and $150 million of near-term debt maturities (October 2026 senior unsecured notes). We expect the company to be opportunistic in its refinance of the senior unsecured notes ahead of their maturity.

Counterbalancing these strengths are elevated non-accruals at 2.6% and 6.3% at FV and cost, respectively, an increase from 1.5% and 5.6% at FV and cost, respectively, at 4Q24. However, the vast majority of non-accruals relate to senior secured first lien loans, likely providing for higher recovery rates. In addition, credit strengths are counterbalanced by the mostly secured funding profile, though somewhat offset by low leverage. Further counterbalancing strengths are potential risks associated with all BDCs such as MSIF’s illiquid assets, retained earnings constraints as a regulated investment company (RIC), and the uncertain economic environment with high base rates, inflation, and geopolitical risks.

Incorporated in 2011 as a Maryland corporation, MSIF is a closed-end, externally managed, non-diversified investment company that has elected to be treated as a business development company under the Investment Company Act of 1940 and as a RIC, which, among other things, must distribute to its shareholders at least 90% of the company’s investment company taxable income.

Rating Sensitivities

We do not anticipate a rating upgrade in the near-to-medium term given the company's ongoing strategic shift as well as a relatively lower level of unsecured debt to total debt compared to higher rated peers. A rating downgrade and/or Outlook change to Negative could be considered if there is a significant downturn in the U.S. economy with negative impact on MSIF’s asset quality, and leverage, or if regulatory asset coverage is breached. A significant change in senior management and/or risk management policies could also lead to negative rating action, though not expected.

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