2023 Outlook for Business Development Companies: Beyond the Bunny Slopes, Challenging Terrain Ahead

This commentary reviews the outlook for Business Development Companies (BDCs) in 2023.

Key highlights include:
• We expect investment portfolio growth to generally remain limited in 2023 as the slowdown in M&A and market uncertainty dampens origination activity.

• BDCs will continue to take market share from the syndicated loan markets as borrowers seek transaction certainty in a volatile macroeconomic environment.

• Net investment income should continue to improve as base rates increase with most BDCs invested in floating-rate loans.

• BDC portfolio company credit performance is expected to weaken from historically strong levels which should manifest in higher non-accruals, realized losses and investment portfolios continuing to be marked at a discount to par value.

• We expect BDC de-leveraging in order to defensively operate at the lower end of target ratios (typically 1.00x - 1.25x debt-to-equity). BDCs who are able to raise new equity will likely continue to access the unsecured market, despite increased borrowing costs as there is a finite amount of secured financing available.

“DBRS Morningstar expects a challenging operating environment in 2023 for BDCs. While higher interest rates should be supportive of BDC net investment income generation (NII), higher debt service costs and a slowing economy will likely lead to a level of stress for BDC portfolio companies driving a rise in nonaccrual loans, as well as realized losses,” said Watson Tanlamai, Vice President – Global FIG.