INTRODUCTION

The answer to the question in the headline – if you happen to be reading your favorite financial publications of late – seems to be an almost certain YES ! Here are a selection of quotes from articles published in the last few days about the “riskiness” of credit:

ANALYSIS

Ominous Headlines

There is a good deal of fear mongering going on about the credit quality of private credit-financed companies both before Liberation Day and in the future, as this selection above reflects.

Even Jamie Dimon – head of JP Morgan – whom you might expect might want to reassure the markets is getting in on the action.

Most of the time, the BDC Reporter stays in its lane and focuses on BDC-by-BDC analysis and avoids the “noise” found in financial publications like Bloomberg, Yahoo Finance and the FT.

However, the drumbeat of negativity is getting so loud that it might be impacting our readers – and BDC investors generally – so we’d thought we’d have a more in-depth look at this Very Important subject.

Read On

We’ve literally read dozens of these jeremiads of late and one take-away we’d offer is to suggest always reading beyond the headlines.

The authors of the articles and the headline writers are not the same and the job of the latter is to grab your attention with as much sensationalism as is reasonably possible.

However, in the body of the text you’ll find – in most cases – data and statements that greatly attenuate the “warnings” being made.

Remember that May 8, 2025 Bloomberg article describing credit troubles at several BDCs?

A little further down, the authors had this to say:

…None of the BDCs reported severe enough measures of troubled credit to ring major alarm bells. And, some are faring better than others.FS KKR Capital, Ares Capital, Blackstone Secured Lending Fund and Sixth Street Specialty Lending all reported marginal declines in their share of loans on non-accrual status, for example”.

No Cracks

The May 14, 2025 Bloomberg article whose headline looks like this: “Private Credit’s Latest Golden Moment Is Hiding the Cracks” followed up with this:

Investors speaking to Bloomberg on condition of anonymity say they haven’t yet had communications from their private credit managers about altering valuations and they don’t expect large falls.“There’s been a little bit of price pressure, but it’s very small,” says Matthew Pallai, CIO at Nomura Capital Management.

Mismatched

The other issue we have with many of the articles is that they tend to quote the same two or three “sources” without fully explaining or understanding them.

One favorite is this from the IMF (which is much repeated), which itself lifted the data from S&P.

Almost half of borrowers from direct lenders had negative free operating cashflow even before the US president’s “liberation day” tariff bombshell, the International Monetary Fund warned last month.

That’s a chilling statistic – if true. Is it? We think not.

Here is a nifty chart from the IMF report from where the numbers were derived:

The source of this data is the set of companies or entities for which S&P Global Ratings has produced Credit Estimates, rather than formal credit ratings. These estimates “are formulated from an abbreviated analysis, often without direct participation from the obligor, and are based on information provided by the requesting party and third-party sources considered reliable by S&P”.

What’s more, the chart above reflects only a hand-picked number of public BDCs and is based on data not provided by the companies involved.

That’s hardly reliable data and hardly reflective of the BDC sector – or private credit as a whole.

As a result, the statement in the Bloomberg article that “half of borrowers from direct lenders had negative free operating cashflow” is plain wrong.

Horse’s Mouth

BTW, S&P Global itself isn’t particularly worried. Based on their most recent report on the entirety of their Credit Estimates , the outlook for non-accruals is only 1.6 % in 2025, but could be as low as 1.0% ! Elsewhere – the ratings group says BDC PIK income as a percentage of earnings has been dropping of late:

 S&P also notes that in the third quarter of 2024, there was a modest decline in PIK-paying loans as a share of BDC assets, breaking the upward trend that had persisted since the second quarter of 2023. Specifically, the share of BDC loan assets with PIK features fell to 10.2% from 11.6%, as the total fair value of BDC loan assets rose sharply1. For the 16 publicly rated BDCs, PIK income declined as a share of gross investment income for six companies in the third quarter and was largely unchanged for three others

Too Broad A Brush

The other problem with much of the reporting on private credit in the financial press is that very little distinction – if any – is made between different market segments.

Generally when the words “private credit” are used, we suppose the writers are referring to leveraged loans to the larger or largest of the non-investment grade borrowers.

However, the metrics – and risks -in the lower middle market (LMM); venture-debt and asset-based arenas are vastly different and bear little relation to what is being said in the financial press.

Vive La Difference

Art Penn of the two PennantPark BDCs has long argued that:

… the perception that larger companies are less risky is not supported by data. He cites S&P research showing that loans to companies with less than $50 million of EBITDA (typical of the lower and core middle market) have a lower default rate and higher recovery rate than loans to larger companies in the upper middle market.Credit statistics in PennantPark’s core middle market portfolio show lower leverage (debt-to-EBITDA ratios), higher interest coverage, and more attractive loan-to-value ratios compared to typical upper middle market deals. 

This view is supported in the latest set of BDC results, with many BDCs serving those segments reported improving debt to equity ratios; debt service coverage and underlying portfolio company revenues and EBITDA.

Both Sides Now

Moreover, almost never mentioned is that most BDCs operating in the “private credit” universe are also equity investors – owning anything from small stakes to 100% – of some of their portfolio companies.

These investments have been made very consciously to serve as an offset against credit losses that might occur elsewhere in their holdings.

In this last quarter, many BDCs – including some involved in the UMM such as Blackstone Secured Lending (BXSL) – boasted of material realized gains, or hinted that they were in the hopper.

BXSL booked $8mn of realized gains but Gladstone Investment (appropriately holding the ticker GAIN) received $21mn – three times its recurring income. Fidus Investment (FDUS) booked $13mn in equity profits. Even a BDC like TriplePoint Venture Growth (TPVG), which has managed to lose tens of millions in recent years ,managed to eke out a $2mn net realized gain.

CONCLUSION

Don’t get us wrong.

It’s quite possible that cracks will open up in the months ahead in “Private Credit” – including in the public BDC sector.

What the Trump Administration has wrought – and continues to do – is upending many business plans and profit projections.

However, there is no factual evidence as yet of a material downturn in credit performance across any of the segments that comprise "private credit" that were not there before at - say - the end of 2024.

Admittedly, we are worried – as mentioned in our most recent BDC Common Stocks Market Recap – that BDC Net Asset Value Per Share (NAVPS) was mostly down in the IQ 2025.

Mind The Gap

Still, it’s a big jump to foresee – as does Mr Dimon – credit losses on a significant scale.

There will always a few new non-accruals or restructurings in any quarter in a BDC financed universe of 7,000 companies – as Bloomberg jumped on in their May 8, 2025 article – but that does not point to a systemic problem.

Oaktree Specialty Lending (OCSL) and Golub Capital (GBDC) – two of the BDCs mentioned – have been facing such reversals for several quarters now so they can hardly be used as the harbinger of some new downward trend, specially with so many other BDCs motoring along with little or no new credit problems.

In fact, we’ve been making a list of new non-accruals across the public BDC universe and been a little surprised about the relatively small number of new non-performers popping up, with most BDCs reporting a clean sheet in this regard. (We’ll publish our list shortly).

Not Impossible

There’s even an argument – and we’re being sanguine here – that rates staying higher for longer, as many pundits are predicting, will prove an unexpected bonus for BDCs and – potentially – offset any tick-up in realized losses.

Don’t Believe Everything You Read

Anyway, the main point of this article is to warn our readers at taking what they read about “private credit” and public BDCs in the mainstream financial press too seriously.

Most of the market players making pronouncements are “talking their book” and the journalists opining on the subject have too little data and too little on the ground experience to provide true early warning signals of a coming crack-up.

This Too Shall Pass?

For years now there have been many market players predicting a recession – and major credit losses – that never came.

Much of 2022 was wasted waiting for the credit Godot that never turned up.

That may prove to be the case again and explain why the great Gold Rush of private credit – attracting capital from around the world – continues even under these downbeat conditions.