Problem loans in business development companies (BDCs) are likely to increase but remain at manageable levels, according to KBRA research.
The ratings agency’s ratings compendium for the fourth quarter of last year and the entirety of 2024 found that BDCs maintained a strategic focus on liability management amid a challenging market landscape marked by tighter spreads, intensifying competition and an oversupply of capital relative to deal flow.
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KBRA said that credit performance among the BDCs it rates remained broadly stable, despite a slight uptick in non-accruals and several restructurings and exits.
The ratings agency noted that BDCs are actively optimising their capital structures, managing funding costs and renegotiating credit facilities to improve their flexibility in a challenging environment.
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“As interest rates remain elevated and economic uncertainty persists, KBRA continues to monitor portfolio stress within BDCs,” the firm said.
“KBRA expects that problem loans will likely increase but remain at manageable levels in the context of current ratings.
“Our outlook remains stable for the rated BDC universe, underpinned by strong liquidity, moderate leverage, and a high allocation to senior secured first lien loan investments in generally economically resilient industries. Exposure to international markets remains limited, mitigating the direct impact of global trade uncertainties.”