2025 BDC Outlook: Protectionist Policies to Benefit Domestic Mid- Market Companies While Regulatory Relaxation to Ignite M&A

This commentary reviews the 2025 Outlook for Business Development Companies (BDCs).

Key highlights include:

-- Differentiation in BDC operating results will continue to widen in 2025, driven by underwriting performance, investment portfolio scale, access to capital and sector selection.

-- Originations expected to expand during 2025 as the M&A and LBO pipeline swells due to lower financing costs and regulatory relief on M&A transactions.

-- Decelerating NII along with higher levels of PIK may lower the quality of earnings for BDCs in the near-term, pressuring cash dividend coverage.

-- While lower borrowing costs and protectionist U.S. policies meant to support domestic businesses may mitigate broader economic issues, we expect BDCs to experience some credit deterioration in the near-term.

-- We expect BDC mergers, manager acquisitions and direct lending partnerships will continue to be attractive opportunities to enhance access to capital, improve scale and product offerings and further investment portfolio diversity.

"Morningstar DBRS' outlook for business develop companies (BDCs) is biased towards the upside in 2025. While we expect a dispersion of operating results to continue through 2025, BDCs will have to navigate lower base rates coupled with potential investment portfolio credit deterioration which may be mitigated by supportive domestic protectionist policies and a robust origination market," said Watson Tanlamai, CFA, Vice President, NA Financial Institutions Ratings.