Moody’s cuts outlook on US BDCs to ‘negative’ on redemption pressure, rising leverage

The pressure falls most acutely on non-traded BDCs, which account for more than 60% of the sector.

A broad ‌swath of these ⁠funds ⁠recorded their first-ever outflows at the start of this year as wealthy individuals and other key ​buyers redeemed their holdings, a sharp reversal from 2025, when inflows had been “very robust” ​as recently as the third quarter, Moody’s said.

The outflows leave those non-traded funds “more on defense when it comes to deploying additional capital until the current market ​shift and uncertainty resolve,” the ratings agency said.

The ⁠non-traded funds ‌raise equity and pair it with leverage to lend ​to private ​companies, structured to continuously raise capital while offering limited, periodic ⁠liquidity to investors.

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Funding conditions deteriorated further, with BDCs pulling back ​from the unsecured bond market as spreads widened, ​Moody’s added.
Michael Covello, executive managing director at specialized investment bank RA Stanger, said the BDCs appeared to have sufficient liquidity to meet near-term needs.”I don’t know that liquidity is an issue as of today,” Covello said. “Long term that could be a different story based on macro events, how their portfolios ‌are constructed and overall net flows.”

Moody’s also flagged emerging risks from artificial intelligence to BDCs’ large exposure to software companies, which account ​for roughly a ​quarter of portfolios.

Though ⁠executives dismissed those concerns as overblown, investors remain on edge. Asset quality remains stable for now, but the agency expects credit performance to weaken as technological disruption ​unfolds.

BDCs, which lend to many of the same middle-market borrowers as private credit funds, serve as an early barometer of stress in the sector.

The outlook could return to stable if redemption pressures ease, leverage remains contained and asset quality risks moderate, Moody’s said.