KBRA releases its Business Development Company Ratings Compendium, which looks at results for the quarter ended June 30, 2025.

In this quarter’s Compendium, KBRA reviews the financial performance of KBRA-rated BDCs in a competitive environment characterized by tighter spreads, elevated repayment activity in the upper middle market—driven by strength in the broadly syndicated loan (BSL) market—solid but slowing capital formation, and a modest pickup in mergers and acquisitions (M&A) activity. Adding to these headwinds is the prospect of lower base rates starting in September, which could weigh on sector-wide net investment income (NII). Among KBRA-rated BDCs, payment-in-kind interest remains a meaningful element of direct lending; however, its prevalence as a share of interest and dividend income has not materially changed year-over-year, underscoring consistent origination practices despite heightened competition.

Performance across KBRA-rated BDCs remained steady in 2Q25 with core credit metrics—including solid liquidity covering short-term maturities, conservative leverage, and non-accrual levels—well within expectations. Collectively, these trends support Stable Outlooks for the vast majority of KBRA’s rated BDC universe, reflecting our view that BDCs are well positioned to navigate an uncertain environment. Further, this view is underpinned by the high proportion of first lien senior secured loans (~89% of fair value investments), as well as expectations that non-accrual growth will remain manageable.

Key Sector Takeaways

• Spreads: Spreads over base rates remain tight, particularly in the upper middle market where they appear to have troughed in the 475-basis point (bp) to 525-bp range, while BSL spreads are at about 370 bps. With the likelihood of lower base rates on the horizon, M&A activity in 2H25 is expected to accelerate, which may help improve spreads.
• Dividends: While base dividends generally remained stable during the quarter, special dividends were reduced or eliminated in many cases due to a decline in NII. A rate cut in September could further pressure NII, potentially leading to base dividend reductions for BDCs without meaningful spillover income.
• Leverage and Origination Discipline: Leverage remains conservative, reflecting subdued deal flow and cautious positioning amid shifting government policy and inflationary uncertainty. BDCs continue to emphasize credit quality, with a primary focus on first lien senior secured loans to less-cyclical U.S. service companies.
• Non-accrual Investments: Non-accrual loans at cost for non-perpetual life BDCs increased modestly to 2.3% of total investments at cost in 2Q25 (versus 1.9% in 1Q25) but remain below the historical average of 3.8% (ARCC peer data). On a fair value basis, non-accrual loans held at 1% of total investments, or near historical lows.
• Liquidity: Liquidity remains solid. KBRA-rated BDCs successfully tapped senior unsecured debt markets, refinancing near-term maturities and, in some cases, executing inaugural issuances amid strong investor demand. A higher share of unsecured debt improves financial flexibility in adverse markets and reduces asset encumbrance, benefiting unsecured noteholders. In addition, many BDCs upsized committed bank lines and extended maturities, further adding to liquidity.
• PIK Income: KBRA’s review of PIK income as a share of total interest and dividend income shows no material change over the past year. While BDCs maintain flexibility to toggle PIK structures—especially in financing high-growth companies—the proportion of loans currently paying PIK remains largely unchanged.

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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