Q4 2024: Ready, Set, Slow! Economic Conditions from Tariffs and Regulatory Uncertainty Delay BDC Origination Growth

This commentary reviews the 4Q24 results and outlook for Business Development Companies (BDCs).

Key highlights include:

-- BDC debt origination growth has been slow as M&A activity remains stagnant from U.S.-driven tariffs and rapid regulatory policy changes. The magnitude of broad-based tariff impacts is unclear due to ongoing trade policy uncertainty around final outcomes on countries and products.

-- PIK income growth as a percentage of total investment incomes is a harbinger to potential credit issues as BDCs provide liquidity relief to existing portfolio companies undergoing stress and may be unable to recoup these investments.

-- A few BDCs had non-accruals well above averages as well as elevated net realized losses as credit deterioration disproportionally affected some platforms.

-- Leverage remained within target ranges while unsecured debt issuance intensified in January but became episodic later in the quarter as higher spreads and market volatility challenged potential BDC issuance.

"BDCs have seen lighter than expected debt originations, as the new U.S. Administration pursues broad-based tariffs, rapidly enacts regulatory policy changes, and tries to cut government expenses through DOGE-related cuts and spending legislation. We expect this trend to continue until the M&A markets return, pressuring investment portfolio growth," said Watson Tanlamai, CFA, Vice President - NA Financial Institution Ratings