BDC Credit Stress Builds as Non-Accruals Climb
Headwinds have become “increasingly evident” in business development companies (BDCs), with selective credit issues becoming more prevalent and non-accrual investments increasing, according to ratings agency KBRA.
Stress is rising at business development companies, but problems remain concentrated among borrowers and managers rather than signaling a broad private credit downturn, according to KBRA.
Median non-accrual investments at non-perpetual-life BDCs rose to 2.75% of investments at cost in the second quarter from 1.81% in the first quarter, KBRA said in its BDC Ratings Compendium. It was 2.3% a year earlier. Nonaccrual loans generally are those on which a lender has stopped recognizing interest income because collection is no longer reasonably assured; an increase can signal worsening borrower performance.
“Selective credit issues became more prevalent across the sector,” KBRA said, contributing to another sequential increase in non-accruals. The ratings agency characterized the shift as a normalization from historically benign credit performance, accompanied by widening differences among borrowers and managers, rather than broad-based deterioration.
Valuation pressure eased after first-quarter markdowns centered on software loans. KBRA said second-quarter valuation changes became more borrower-specific, even as investors assessed whether artificial intelligence could disrupt software companies, a major source of private credit borrowing.
Income remains pressured by lower base rates than in 2025, tighter loan spreads and muted merger, acquisition and refinancing activity. Those conditions reduce the interest and fee income BDCs generate, but KBRA said they primarily reflect the market environment, not a widespread deterioration in borrowers’ ability to repay.
Leverage remained broadly stable among non-perpetual-life BDCs, although weaker asset quality pushed it higher at some vehicles. Perpetual-life BDC leverage increased modestly as investment deployment and, at certain issuers, shareholder redemptions outpaced debt repayment.
The report covered 35 rated BDCs, including public and unpublished ratings. BDCs are closed-end investment companies that lend to small and midsize private businesses, giving investors access to private credit while carrying credit, valuation and leverage risks.
Redemption pressure has added scrutiny. Fitch reported that second-quarter withdrawal requests increased at 10 of the 16 perpetual nontraded BDCs it tracked, highlighting the liquidity tension created when vehicles offering periodic repurchases hold loans that do not trade frequently.