Concerns over the health of the private credit sector are leading ratings agencies to take a look at a somewhat obscure part of capital markets: business development companies. Troubles in the legacy software sector due to the ascent of AI, along with pressure from a higher-for-longer interest rate outlook, are causing writedowns of loans, and rating agencies are concerned about the overall leverage levels of BDCs. "We're monitoring leverage trends across BDCs, as several were at the high-end of their targeted ranges as of year-end 2025," Chelsea Richardson, senior director at Fitch Ratings, said Monday. "We believe these BDCs sought to reduce leverage with portfolio repayments amid slower origination activity, but expect writedowns of software investments to negatively affect net asset values." Cuts to BDC dividends could be the result of the leverage pressures, Richardson noted, seeing stress in net investment income and "potential for higher non-accruals, as we've already seen in some preliminary results." Moody's downgraded its outlook for BDCs to negative from stable on April 7, citing high leverage as well as "increased redemption pressures" as investors looked to pull money from funds. "Publicly traded BDCs have maximized leverage, leaving limited room for error," senior credit officer Clay Montgomery wrote for Moody's. Software loans were also their concern, which they described as "developing asset risk" due to AI – though one that will take years to play out. BDCs often invest in securitized vehicles like collateralized loan and debt obligations, which the private credit sector has been using to amend-and-extend loans facing maturities. One type of these vehicles known as a middle market CLO, which are a favorite of BDCs, represents a growing segment of securitizations. "Middle market CLOs are tied to the expanding credit markets, where non-bank lenders such as private debt funds, business development companies, and insurance companies provide loans directly to companies, bypassing the bank loan syndication process," researchers for Guggenheim wrote in a 2025 analysis. But BDCs have come under scrutiny following restrictions on withdrawals from leading BDC Blue Owl Capital. Facing a spate of redemption requests, Blue Owl tried to merge two of its funds last year before calling off the deal. The Federal Reserve is asking big U.S. banks about their exposure to private credit, Bloomberg reported earlier this month. The point of the inquiry was to determine how sound the private credit industry is as a whole and whether stresses could translate into the wider banking sector. Private equity funds are on the defensive amid scrutiny on the sector. Blackstone CEO Stephen Schwarzman said on the company's first-quarter earnings call this month that his company has "been navigating an intensely negative campaign against the private credit sector despite the strong long term returns generated in this area, resilient fund structures and continued healthy demand from institutional investors and insurance companies."
