Q1 2025: Lower BDC Profitability Despite Limited Direct Portfolio Company Exposure to Tariffs and Federal Spending Cuts

This commentary reviews the Q1 2025 results for Business Development Companies (BDCs).

Key highlights include:

-- Lower weighted average portfolio yields alongside limited investment portfolio growth challenged BDCs' profitability in Q1 2025.

-- Limited direct tariff and federal spending exposure within investment portfolios, though second-order effects are uncertain and unlikely to be incorporated into operating results until 2H 2025.

-- PIK income growth across the BDC sector foreshadows potential credit risk as 2021 and 2022 originations appear most at risk of credit deterioration.

-- Credit quality for BDCs focused on upper middle market borrowers with EBITDA of $200 million or higher has outperformed the sector through Q1 2025.

"Leverage remained within or below target ranges while non-traded BDCs continued to benefit from strong net inflows of equity. The unsecured debt issuance market has started to come back in May, but many potential issuers are waiting on the sidelines until credit spreads tighten," said Watson Tanlamai, CFA, Vice President - NA Financial Institution Ratings.