Bond market investors are demanding varying risk premiums from U.S. private lending companies, with smaller firms facing significantly higher costs compared to their larger counterparts, according to a new financial analysis.
This pricing gap demonstrates increasing investor selectivity in a marketplace experiencing heightened borrower difficulties following years of high interest rate environments.
Business development companies, which primarily provide loans to middle-market businesses and frequently raise funds through public bond offerings, are now being evaluated more rigorously based on their portfolio strength, operational size, and capital access capabilities.
According to LSEG data, BCP Investment Corp recorded the highest weighted average option-adjusted spreads at 680 basis points, with Prospect Capital Corp following at 449 basis points, Trinity Capital Inc at 403 basis points, and Fidus Investment Corp at 392 basis points.
Option-adjusted spreads represent the additional return investors require above Treasury securities after accounting for features like call options. Elevated spreads may indicate market appetite or concerns regarding credit worthiness and funding risks.
Meanwhile, major firms such as Ares Capital Corp, Blackstone Secured Lending Fund, Blue Owl Capital Corp, and Golub Capital BDC maintained spreads ranging approximately between 150 and 200 basis points.
This spread differential has expanded throughout the current year, as investors begin distinguishing between companies with greater exposure to artificial intelligence disruption within software-as-a-service businesses.
“There’s dispersion in BDC equity, but it’s still limited in BDC bonds given strong demand for carry in this environment,” stated Aditya Aney, co-founder of Andromeda Capital Management in London.
“However, we think this will change over the coming months triggered by downgrades, higher or more volatile rates and greater focus on sector (SaaS) exposures,” he added.
The financial review examined 884 bonds from 41 business development companies, focusing on bond offerings of at least $50 million with available comparison data. Company-level spreads were determined by weighting individual bond spreads according to issue size.
Trinity Capital’s weighted average spread expanded by 140 basis points, while Fidus increased 92 basis points and Prospect Capital rose 85 basis points. BlackRock TCP Capital’s spread climbed 40 basis points, with Goldman Sachs BDC, Golub Capital, Blue Owl Technology Finance, and Blue Owl Capital experiencing increases between 20 and 31 basis points.
Ares Capital’s spread remained relatively stable, while Sixth Street Specialty Lending, Hercules Capital, and Morgan Stanley Direct Lending demonstrated slight improvements.
This selective approach occurs amid deteriorating private credit market conditions.
Default rates among U.S. private credit borrowers monitored by Fitch Ratings reached 6% during the 12-month period ending in April, marking the highest level since tracking began in August 2024.
Additionally, Fitch revised its outlook on Goldman Sachs BDC to negative, pointing to recent portfolio credit weakening and insufficient asset-coverage protection.
