Fitch Ratings has warned that private credit and business development companies (BDCs) face additional headwinds due to the recent escalation in the global trade war.
The ratings agency said that t expects and to see additional non-accruals across BDC portfolios in 2025 given the continuation of elevated interest rates and the challenging economic backdrop, including the impacts of tariffs on some portfolio companies.
Fitch noted that while diversified portfolios can help mitigate the negative effects from tariffs on asset quality, the BDC sector has not yet been tested by a severe economic downturn. The firm predicted that the industries that will be indirectly impacted by Trump’s tariff war include consumer and retail, among others.
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“US-focused software, business services and healthcare-oriented companies, which are often the top industry exposures for BDCs, may be less affected,” said Fitch.
“In general, the BDCs have limited exposure to industries that are directly affected by tariffs. However, BDCs face second order effects, especially if a prolonged recession materialises that would pressure portfolio company performance more broadly.
“BDCs’ direct exposure to first-order industries that will be most affected by tariffs, including manufacturing, industrial, distribution and auto, is limited to less than ten per cent of BDC portfolios, on average, at fair value.”
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Fitch also predicted that unsecured debt issuance could slow if bond spreads remain wide, hampering BDCs’ ability to get ahead of the upcoming debt maturity wall in 2026.
As a result, Fitch has confirmed that its 2025 sector outlook for BDCs remains “deteriorating”, reflecting expectations for a more competitive underwriting environment, weaker net investment income and dividend coverage, and potential non-accruals and losses amid high interest rates and the challenging economic backdrop.
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