In the latest episode of our “Clarity in Credit” podcast series, Chloe Blais, Vice President, European Corporate Ratings, Diversified Industries & Energy, and Eric Chan, Vice President, Global Non-Bank Financial Institutions, discuss business development companies (BDCs) with Watson Tanlamai, Vice President, Global Non-Bank Financial Institutions. 

The story of private credit has been years in the making, with this faction of the market experiencing a phenomenal surge in growth over the past several years. The BDC sector--as a subset of private credit--has recently garnered more than its fair share of attention from the press. In this episode, we discuss the ins and outs of this particular investment vehicle, the current industry landscape, and our outlook for this sector.

KEY HIGHLIGHTS

• BDCs are vehicles that invest in a diversified portfolio of debt of both sponsor-backed and non-sponsored-backed U.S. companies, often with expertise in a certain area of the market. BDCs may be traded on public stock exchanges or non-traded.
• Despite broad macroeconomic challenges, BDC portfolio credit performance has been relatively strong over the past few years with notable growth in the sector’s assets under management.
• Expectations for lower interest rates in 2026 may adversely affect the sector’s earnings; however, this may be balanced by floating-rate funding costs and the rationalizing of dividend payments to BDC shareholders.
• BDCs generally maintain diversified portfolios with smaller individual position sizes, which should insulate larger players from industry-specific risks, such as credit risk exposure to the software industry because of ongoing artificial intelligence shocks.
• The prevalence of payment-in-kind (PIK) interest deferral mechanisms offered by BDCs is discussed, including how the structure and relative quantum on PIK features may affect asset quality.
• Overall, a divergence in the credit profiles of BDCs is expected. Well-performing, large BDCs are expected to exhibit more resilience relative to smaller BDCs, which may be more susceptible to macroeconomic headwinds because of their comparatively lower operational flexibility. 

RELATED RESEARCH 

• “2026 BDC Sector Outlook Neutral: Naughty or Nice List Lengthens,” https://dbrs.morningstar.com/research/469393

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