June 26 - Fitch Ratings has completed a peer review of six rated Business Development Companies (BDCs) in concert with its publication of an industry report, titled 'Business Development Companies - A Comparative Analysis 1Q12', which is available on Fitch's website. Based on this review, Fitch has affirmed the long-term Issuer Default Ratings (IDRs) of American Capital, Ltd. (ACAS), Apollo Investment Corporation (Apollo), Ares Capital Corporation, Fifth Street Finance Corp., PennantPark Investment Corporation, and Solar Capital, Ltd . The IDRs of the all of the affected BDCs are in the 'BBB' rating category with the exception of ACAS which is rated 'B+'. A full list of ratings is provided at the end of this release. The Rating Outlook for ACAS has been revised to Positive from Stable; the Rating Outlook for Apollo has been maintained at Negative; and the Rating Outlook for the remaining BDCs has been maintained at Stable. The rating affirmations reflect relative stability in the industry in terms of core operating performance and asset quality, and the maintenance of leverage levels below management's targeted range. Portfolio growth has slowed from 2010 levels, as more recent market entrants mature and gain scale, but remains relatively robust. Still, BDCs' investment focus has centered on more senior positions in the capital structure of underlying companies, given reduced competition in the space, while equity exposures have generally declined. Valuation volatility remains, as evidenced by the meaningful unrealized portfolio depreciation recognized in the third quarter of 2011 (3Q'11), but Fitch believes quarterly movements have been more digestible given reduced leverage ratios. Net realized losses on portfolio investments have been meaningful since the start of the crisis, as BDCs have recognized declines in value, participated in portfolio company recapitalizations, or exited underperforming investments in an effort to redeploy proceeds into higher-yielding securities. Portfolio losses have declined over the past five quarters, and several BDCs recognized modest gains in early 2012. Over time, Fitch does not expect realized gains and losses to be a meaningful component of net income, given declines in portfolio equity holdings and improvements in asset quality. Funding flexibility has improved in recent quarters, with several BDCs accessing the unsecured debt markets via the issuance of convertible notes and/or retail notes. Fitch views an unsecured funding component favorably as it provides funding diversity, as well as flexibility to encumber assets if necessary for liquidity purposes. Debt maturity profiles have also been improved, with many BDCs amending and extending bank facilities to allow for three year revolving periods followed by one-year of amortization. This term debt structure provides for better matching with the three-to-four year average life of portfolio investments. Public equity issuance in early 2012 is close to surpassing all of 2011, as share prices have generally moved closer to net asset values. BDCs are expected to continue to access the markets opportunistically for growth capital and Fitch expects additional issuance over the balance of 2012. On the downside, portfolio concentrations have generally ticked-up across the industry, despite declines in leverage, given follow-on investments in existing companies and larger positions in new portfolio investments. Fitch believes portfolio diversity is critical, as the underperformance of one or more large investments can have an outsized impact on leverage. As a result, BDCs with higher concentrations as a percent of book equity, are expected to manage leverage more conservatively, all else equal. Another point of focus for Fitch is net investment coverage of dividends, given the regulatory requirement that BDCs distribute 90% of taxable income on an annual basis. While several BDCs instituted dividend cuts in the past several years to better match core earnings and distributions, coverage of dividends remains weaker than expected for some, particularly when adjusting for non-cash income accruals. Fitch would view core cash earnings coverage at or near 100% on a consistent basis favorably. Fitch believes positive rating momentum for the industry is limited to the 'BBB' category given the relative illiquidity of portfolio investments, limited funding flexibility, an inability for BDCs to retain capital due to distribution requirements, and the impact that fair value accounting has on leverage. However, negative rating action for any one issuer could be driven by deterioration in asset quality or core operating performance, increases in equity holdings without commensurate reductions in leverage, weakening cash income coverage of dividends, and/or the recognition of sizeable unrealized portfolio depreciation which forces leverage above management targets for extended periods or reduces cushions on debt covenants. The Positive Outlook assigned to ACAS' ratings reflects the reduction in non-accrual levels, improved core operating performance, and reduced leverage. While exposures to equity investments remain large relative to peer BDCs, Fitch expects leverage will remain well-below the peer average for some time. Additionally, about half of the equity exposure is attributable to the relatively diverse portfolio of European Capital, Ltd. and the asset manager, American Capital, LLC; the valuation of which is driven largely by management fees received from funds with permanent capital. Fitch has also revised the recovery ratings for ACAS' secured debt to 'RR1' from 'RR2' and upgraded the debt and recovery ratings for its unsecured debt to 'B+/RR1' from 'B-/RR6' to reflect improved recovery prospects for creditors given an increase in available collateral, reduced balance sheet leverage, and in shortened risk horizon to maturity. Fitch expects remaining unsecured debt of $11 million will be repaid with balance sheet cash when it comes due in August 2012. The Negative Outlook for Apollo's ratings continues to reflect recent corporate announcements, including the replacement of the firm's Chief Investment Officer and Chief Financial Officer and the expansion of the investment mandate beyond a focus on subordinated/mezzanine financing. Fitch will assess the impact of these announcements over the next 12-18 months. Still, negative rating action could occur more quickly should there be an inability to deploy investment capital into accretive middle market investments, an extended increase in leverage above the targeted range, resulting from increased borrowings or material unrealized depreciation, deterioration in portfolio asset quality, and/or a decline in cash income coverage of the current dividend. Fitch has affirmed the following: American Capital, Ltd. -- Long-term IDR at 'B+'. Apollo Investment Corporation -- Long-term IDR at 'BBB'; -- Secured debt at 'BBB'; and -- Unsecured debt at 'BBB-'. Ares Capital Corporation -- Long-term IDR at 'BBB'; -- Secured debt at 'BBB'; and -- Unsecured debt at 'BBB'. Allied Capital Corporation -- Unsecured debt at 'BBB'. Fifth Street Finance Corp. -- Long-term IDR at 'BBB-'; -- Secured debt at 'BBB-'; and -- Unsecured debt at 'BBB-'. PennantPark Investment Corporation -- Long-term IDR at 'BBB-'; and -- Secured debt at 'BBB-'. Solar Capital, Ltd. -- Long-term IDR at 'BBB-'; and -- Secured debt at 'BBB-'. Fitch has also taken the following rating actions: American Capital, Ltd. -- Secured debt revised to 'BB/RR1' from 'BB/RR2'; and -- Unsecured debt upgraded to 'B+/RR1' from 'B-/RR6'.