2Q24 BDC Roundup: Spread Compression Not Yet Constraining Profitability While Credit Quality Remains Supportive of Ratings

This commentary reviews the 2Q24 earnings, operating performance, and outlook for business development companies (BDCs).

Key highlights include:

-- While credit spread compression has occurred through upper middle market and middle market transactions, we expect BDC earnings ramifications will take time to occur due to call protection.

-- Private credit refinancings doubled year-to-date compared to the prior year period with an increasing percentage compared to LBO and M&A financing.

-- BDC net investment income and net income broadly remained in positive territory with one exception across our coverage universe over 2Q24.

-- While non-accruals as a percentage of the investment portfolio at cost increased on average during 2Q24, both the average and median still remained well below recent peak levels during Spring 2020.

-- Leverage decreased by 2% quarter-over-quarter on average at 2Q24, with almost all of our coverage universe operating below 1.25x debt-to-equity, as BDCs wait Fed rate decisions before returning to the unsecured debt markets.

"We expect the BDC unsecured debt issuance market to regain momentum in September once Fed interest rate decisions are made and management teams have clarity on origination deal flow and equity inflows for the remainder of the year." said Watson Tanlamai, CFA, Vice President, NA Financial Institutions Ratings.