By Mackenzie Tatananni
It seems every day there's another headline about a meltdown in private credit. Much of the conversation has centered on non-traded business development companies -- and while the implications for listed BDCs are less clear, these investment funds appear to be under similar stress.
Public BDCs aren't bound by the same quarterly redemption limits as non-traded BDCs. Investors in these types of funds can exit their positions at market prices during normal trading hours, without asking for permission or waiting for a quarterly deadline.
And yet, the price-to-net asset value ratios of listed BDCs have slumped recently, with most listed BDCs now trading at a discount to their NAV. Capital Economics, a London-based research firm, argued in a Tuesday asset allocation update that these falling valuations "suggest that stress is building beneath the surface."
It may be tempting to write off the weakness as a ripple effect from non-traded BDCs, but concerns are warranted, the firm argued. Returns on high--yield corporate bonds, "arguably the closest liquid substitute for private credit," have held up fairly well, which rules out the possibility of a market-wide panic. Consequently, the weakness may reflect concerns over concentration risk and the quality of underlying loans.
There's more to digest than the sector's exposure to software and related worries over artificial-intelligence disruption. Private credit default rates have been rising "for a while," Capital Economics pointed out. Although the U.S. private credit default rate as tracked by Fitch Ratings fell to 5.4% in the trailing 12-month period ended in February, this was down from a peak of 5.8% in January -- the highest rate since Fitch launched the report series in August 2024.
Moreover, there's evidence BDCs may be struggling to maintain dividend payouts, Capital Economics contended. Dividend coverage ratios, or the ratio of net investment income to total dividends, have been drifting downward. While this doesn't mean dividends are unsustainable, "it nonetheless is suggestive of strains," the firm added.
And while there's presently no risk of a spillover into risky lending and financial markets more broadly, stress indicators are "clearly moving in the wrong direction," Capital Economics wrote, adding that this increases the likelihood BDCs could be forced into rapid loan markdowns. In the firm's view, a further deterioration could lead to stricter credit conditions for small and medium-sized businesses.
Keefe, Bruyette & Woods sees it differently. Although the surge in redemption requests among non-traded BDCs seems alarming, the firm believes investors are witnessing a liquidity-driven event fueled by fear, rather than a fundamental decline in credit quality.
As the backlog of liquidity demand continues to build this year, redemptions will pose a significant headwind, the firm wrote. However, large perpetual BDC managers will likely be able to meet this demand, with restrictions imposed into the foreseeable future.
Amid a rebalancing of supply and demand for liquidity in the private BDC space, listed BDCs, which benefit from permanent capital and daily liquidity, "are structurally advantaged and can emerge as net winners," KBW wrote.
There isn't evidence of meaningful capital rotation from private to public BDCs just yet but "the set-up is compelling," the firm asserted. There were roughly $138 billion worth of perpetual BDC net assets as of the fourth quarter. If just 1% of investors were to make the switch to public BDCs, that would result in $1.4 billion flooding into the space, KBW estimates.
This presents a buying opportunity. "Any BDC that is well capitalized and doesn't have significant capital outflow burden that a manager needs to prioritize should be well positioned," KBW wrote.
The firm has identified a handful of BDCs that are positioned as clear winners, particularly Sixth Street Specialty Lending, Ares Capital, and Blue Owl Capital's Technology Finance Corp.
Write to Mackenzie Tatananni at mackenzie.tatananni@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
April 07, 2026 11:26 ET (15:26 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
Comments