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Publicly Listed BDCs at Risk: Analyzing Credit Quality

A recent report by Heron Finance has identified a growing disparity in credit quality between publicly traded business development companies (BDCs) and their non-traded peers. This alarming trend presents potential risks to investors, especially those considering BDCs for private credit exposure.

Overview of the Analysis

Heron Finance's Monthly Insights report, entitled What You Need to Know About Private Credit BDCs, provides a detailed examination of the performance and risk characteristics of both publicly listed and non-traded BDCs. By analyzing data from the third quarter of 2025, the report underscores an increasingly concerning credit landscape for publicly listed BDCs.

According to Khang Nguyen, Chief Credit Officer at Heron Finance, the insights reveal that publicly listed BDCs are grappling with more than just market volatility; they are also facing deteriorating credit fundamentals. On the contrary, non-traded BDCs, particularly those available through Heron, have been able to maintain a more resilient and stable credit profile.

Key Findings in Credit Quality

The analysis highlighted several critical risk metrics showcasing the credit quality discrepancies:

1. Payment-in-Kind (PIK) Interest: Publicly traded BDCs recorded a PIK interest level of 5.3%, indicating a potential liquidity strain among borrowers, compared to only 3.1% for non-traded BDCs.

2. Non-Accrual Loans: Publicly listed BDCs showed a non-accrual rate of 2.7%, whereas non-traded BDCs maintained a negligible 0.3%, suggesting a much healthier underlying loan portfolio in the latter group.

3. Loan Valuation: The fair market value as a percentage of the cost for publicly listed BDCs stood at 98.4%, which may reflect elevated default risks or deteriorated borrower health, while non-traded BDCs achieved a better valuation rate of 99.8%.

4. Portfolio Underperformance: The underperformance metric is alarming for publicly listed BDCs at 10.6%, in stark contrast with 3.5% for non-traded BDCs.

These statistics illustrate a worrying trajectory for publicly traded BDCs and prompt investors to reassess where they allocate resources within this market.

Structural Differences Behind the Disparity

Heron's analysis sheds light on the structural differences that contribute to this credit quality divide. Publicly listed BDCs are vulnerable to stock market fluctuations and often hold legacy loans originating from a low-rate environment, making them susceptible to pricing swings unrelated to the performance of the underlying loans. Non-traded BDCs, on the other hand, exhibit several advantages:

• - Monthly Net Asset Value (NAV) Pricing: This approach limits market noise and provides a more accurate picture of the financial health of the portfolios.
• - Newer Loan Vintages: Non-traded BDCs tend to hold loans aligned with the current higher-rate environment, enhancing their credit resilience.
• - Lower Reported Volatility: Non-traded BDCs enjoy smaller fluctuations in asset pricing, leading to stronger credit quality metrics.

Khang Nguyen emphasizes the importance of investors scrutinizing the underlying credit conditions tied to publicly listed BDCs. He cautions that attractive discounts to NAV may mask deeper underlying credit challenges that could lead to significant losses.

Conclusion

As the financial landscape evolves, the critical differences between publicly traded and non-traded BDCs become increasingly apparent. Investors looking to navigate the complexities of private credit are advised to closely evaluate these distinctions to safeguard their portfolios against potential risks.

For a comprehensive understanding of the performance and risk characteristics of private credit BDCs, readers are encouraged to explore the complete report available on Heron Finance's website.

In summary, while publicly listed BDCs may appear to offer alluring investment opportunities, it's vital to dig deeper and understand their credit quality realities, primarily when considering avenues for private credit exposure.