KBRA Releases Research – Private Credit: Business Development Company (BDC) Ratings Compendium: Third-Quarter 2025 and 2026 Outlook

NEW YORK--(BUSINESS WIRE)--KBRA releases its Business Development Company Ratings Compendium, which looks at results for the quarter ended September 30, 2025, and 2026 Outlook.

In this quarter’s Compendium, KBRA reviews the financial performance of our rated business development companies (BDCs) in a landscape characterized by ongoing competitive pressures, declining but still high base interest rates, and distribution yield preservation. Credit performance across KBRA’s rated BDC universe remained generally solid in 3Q25, although signs of late-cycle softening have begun to emerge. While most BDCs continued to report stable credit metrics, dispersion widened across platforms—reflecting idiosyncratic pressures and selective borrower underperformance. During the quarter, we had no changes in ratings or Outlooks for the KBRA-rated BDC universe. Looking forward into 2026, KBRA’s rating outlooks are generally stable for our rated BDCs.

The broader operating environment during the quarter was marked by tight spreads, renewed mergers and acquisitions (M&A) activity, and continued capital formation within the perpetual-life BDC channel. Favorable market conditions supported robust unsecured debt issuance, expansion of bank credit facilities, and increased middle market collateralized loan obligation (CLO) formation, which bolstered BDC liquidity and funding profiles. KBRA-rated BDCs are aided by strong access to bank credit facilities, reflecting considerable overall relationship depth between major banks and large BDC managers. These funding advantages enabled BDCs to proactively refinance near-term maturities, extend liability maturities, and maintain solid liquidity profiles heading into 2026. KBRA believes that its rated BDCs can navigate an uncertain environment effectively, driven by relatively low leverage and highly diversified investment portfolios with a high percentage of first lien senior secured loans to middle market companies generally within less cyclical industries.

Key Takeaways

Dividend Coverage Remains a Concern for Equity Investors

Competitive pressures, tightening spreads, and the potential for additional rate cuts have many KBRA-rated BDCs adjusting their dividend strategies to allow for more flexibility while providing a more stable base rate over the medium term. Perpetual-life BDCs continued to rely on fee waivers. Some non-perpetual life BDCs reduced or eliminated their supplemental and/or special distributions in line with declines in net investment income (NII). Several BDCs reduced their base dividends to align with base rate expectations. From a credit standpoint, interest expense coverage for rated debt is expected to remain quite solid.

Stable but Softening Asset Quality

Investments on non-accrual status remain low but increased year-over-year (YoY) to a median of 2.5% of total investments at cost (1.3% at fair value (FV)) for non-perpetual life BDCs. The vast majority of internal risk ratings remain in categories reflecting performance at or above expectations (93.7%), supported by strong portfolio diversification and a high mix of first lien senior secured loans in generally less cyclical sectors. KBRA-rated BDCs have low direct exposure to tariffs, given a focus on portfolio company, service-based businesses in the U.S.

Outlooks Remain Stable but Cautious

KBRA maintains Stable Outlooks for most of its rated universe of BDCs going into 2026, supported by solid liquidity, manageable leverage, and strong access to senior unsecured debt and bank credit facilities. However, elevated base rates, mixed macroeconomic signals, and geopolitical risk warrant caution. BDCs continue to focus on proactive risk management, measured leverage, and active engagement with portfolio companies.

Click here to view the report.

About KBRA

KBRA, one of the major credit rating agencies, is registered in the U.S., EU, and the UK. KBRA is recognized as a Qualified Rating Agency in Taiwan, and is also a Designated Rating Organization for structured finance ratings in Canada. As a full-service credit rating agency, investors can use KBRA ratings for regulatory capital purposes in multiple jurisdictions.

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