Business development company (BDC) portfolio valuations were under pressure in the first quarter of this year, as market spreads widened, software company valuations declined, and non-accruals increased, according to new research by Fitch Ratings.
Net asset values (NAVs) for the 32 BDCs rated by Fitch declined by an average of two percent, or two and a half per cent per share, in the first quarter.
The reduction in NAVs reflect realised and unrealised investment losses, as well as changes in derivative contracts, earnings overdistribution, share repurchases, as many BDCs traded at discounts to NAV.
Read more: Semi-liquid structures: the double-edged sword
New Mountain Finance and FS KKR Capital stand out for posting the largest NAV decline, down 11.7 per cent and 9.8 per cent, respectively. Meanwhile, Goldman Sachs Private Credit Corp. maintained the largest increase, up 6.2 per cent.
Read more: Software sell-off sparks credit fears, but experts say debt is safe
Fitch argues valuations will remain under pressure as portfolio maturities build in 2028.
It found that leverage among rated BDCs increased as valuation adjustments reduced equity. At the end of March, nine BDCs were at or above 1.25x leverage, which is typically the high end of their target range.
Fitch also said that dividend coverage is weakening among BDCs, with 11 rated BDCs announcing dividend cuts in the first quarter. Fitch suggests additional cuts are possible in 2026.
Read more: Moody’s: BDC loan marks may exaggerate signs of private credit stress
