The sector outlook for business development companies (BDCs) is “deteriorating” amid a decline in asset quality metrics and “elevated” redemption pressure for perpetually non-traded BDCs, according to Fitch Ratings.
Expectations for ongoing pressure on net investment income and dividend coverage are also weighing on its outlook.
The ratings agency came to its conclusion following a peer review of 13 US BDCs, in which it assigned “negative” ratings outlooks to three BDCs and “stable” outlooks to the remaining 10 BDCs in the peer group. It affirmed the long-term issuer default ratings on 12 issuers and completed one “review no action”.
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Citing “limited” mergers and acquisitions activity, Fitch said it also expects the competitive underwriting environment for BDCs to continue in the near term.
However, the ratings agency acknowledged that if higher redemptions and slower fundraising at perpetually non-traded BDCs is sustained, this could “reshape” the competitive landscape.
“Spreads have started to widen from tight levels and BDCs with access to growth capital could gain a competitive advantage if improved deal terms persist,” Fitch Ratings said.
Fitch Ratings noted that it does not expect the threat posed by AI to software companies to drive meaningful deterioration in asset quality metrics in 2026, although “it could pressure the performance of some companies in future years”.
According to Fitch, divergence in asset quality metrics among BDCs will continue due to differences in underwriting standards, portfolio risk profiles and workout capabilities.
“Perpetually non-traded BDCs are experiencing elevated redemption pressure, which can weaken liquidity, reduce asset coverage cushions and constrain portfolio management flexibility. The three perpetually non-traded BDCs in this peer review have sufficient liquidity and asset coverage cushions to support several quarters of maximum five per cent quarterly tenders,” Fitch stated.
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