Private credit has long been marketed as a stable, high-yielding alternative to traditional bank lending. But a new Reuters analysis of publicly traded business development companies (BDCs) suggests the asset class is feeling the heat from higher interest rates and deteriorating loan performance.
Using data from S&P Global Market Intelligence, Reuters reviewed 53 BDCs and found that 28 of them posted net losses in the first quarter of 2026. The losses were driven by a combination of loan writedowns and rising borrowing costs, which squeezed the margins these funds earn on the loans they make to midsize companies.
What Are BDCs and Why Do They Matter?
Business development companies are a type of publicly traded investment vehicle that lend to small and midsize businesses, often in the form of leveraged loans. They are required to distribute at least 90% of their taxable income to shareholders as dividends, making them popular with income-focused investors.
Because BDCs trade on public exchanges and report quarterly earnings, they offer a rare window into the broader private credit market, where nonbank lenders have increasingly replaced traditional banks. The private credit market has grown to an estimated $1.7 trillion globally, but most of that activity happens behind closed doors, with limited disclosure. BDCs, by contrast, are required to file detailed financial statements with the SEC, making them a useful proxy for the health of the sector.
For context, the broader private credit market has been under scrutiny as interest rates remain elevated. Higher rates increase the cost of borrowing for BDCs themselves, while also making it harder for their portfolio companies to service debt. This dynamic has led to a rise in loan writedowns, as seen in the Q1 data.
What the Numbers Show
The Reuters analysis standardized results across all 53 BDCs into a single bottom-line figure that includes funding costs and changes in the value of loan portfolios. The finding that more than half of the funds posted losses is a notable shift from recent years, when low interest rates and strong economic growth helped BDCs deliver consistent profits.
Loan writedowns were a key factor. As borrowing costs rise, some of the midsize companies that BDCs lend to are struggling to meet their obligations. This has forced BDCs to mark down the value of those loans, directly hitting earnings. At the same time, the BDCs themselves face higher financing costs, as the debt they use to fund their lending becomes more expensive in a high-rate environment.
The data comes amid a broader reassessment of private credit risks. Earlier this year, Asia's big investors stress-tested private credit risks alongside AI costs and fiscal credibility, as reported in Asia's Big Investors Stress-Test AI Costs, Private Credit Risks, and Indonesia's Fiscal Credibility. That article highlighted growing concern among institutional allocators about the opacity and potential fragility of private credit markets.
What It Means for Investors
For everyday investors, the BDC data is a reminder that private credit is not immune to the same pressures that affect other parts of the financial system. While BDCs have historically offered attractive dividend yields, those payouts are only as safe as the underlying loans.
Investors should watch for further signs of stress, such as rising nonaccrual rates (loans that are no longer generating interest income) or dividend cuts. The fact that 28 out of 53 BDCs posted losses suggests that the sector is entering a more challenging phase, though it does not necessarily signal a systemic crisis. Many BDCs have built up reserves and have access to credit lines that can help them weather short-term difficulties.
It is also worth noting that BDCs are not all alike. Some focus on safer, senior secured loans, while others take on more risk with junior debt or equity investments. The performance of individual BDCs can vary widely, so investors should look beyond the aggregate numbers and examine the specific portfolios and leverage levels of any fund they own or are considering.
The broader private credit market has also been in the spotlight for other reasons. For example, New Zealand's Credit Picture Brightens as Arrears Hit Four-Year Low shows that not all credit markets are under pressure, but the divergence highlights the importance of geography and sector exposure.
What to Watch Next
Investors will be watching the next round of BDC earnings, due in late July and August, to see if the trend of losses continues or accelerates. Key indicators include the level of new loan originations, the pace of writedowns, and any changes in dividend policies.
Regulators are also paying closer attention. The Securities and Exchange Commission has signaled increased scrutiny of private credit valuations, and any new rules could affect how BDCs and other private lenders report their results.
For now, the Reuters analysis serves as a public scoreboard for a market that usually operates in the shadows. The yellow flashing light is a signal for investors to do their homework and understand the risks behind the yield.
