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BDC Origination Volumes Decline in 3Q22 as Market Dynamics Shift, Earnings Benefit from Rising Rates

This commentary reviews 3Q22 results for Business Development Companies (BDCs).

Key highlights include:
• Market dynamics for business development companies' (BDCs) loan sourcing were mixed in 3Q22, with overall financings decreasing in 3Q22. Loan originations are expected to remain muted in 4Q22.

• NAVs stabilized in 3Q22, though we have not seen a rebound in unrealized gains yet. Earnings expansion through higher base interest rates have helped BDCs who generally hold 90%+ floating-rate assets.

• We expect non-accruals to increase as 2023 progresses as newly originated loan portfolios season, with higher borrowing costs and general macroeconomic conditions further burdening portfolio companies.

• In the near-term, we anticipate BDCs will look to operate at the lower end of their target leverage ratios. BDCs that are operating significantly lower than their leverage targets, or ones that are raising significant equity amounts, will likely continue to access the unsecured market, despite increased borrowing costs.


“The fixed income capital markets have re-opened to BDC issuers, though at higher overall costs of borrowing due to interest rate hikes and investor risk appetite. Near-term BDC debt maturities have already been refinanced in 2021 or earlier in 2022, giving management teams the flexibility to be opportunistic when accessing the more expensive unsecured markets. We expect BDCs that operate at significantly below their leverage targets, or ones that have large net equity inflows, to continue accessing the unsecured market, despite the increased costs,” said Watson Tanlamai, Vice President – Global FIG.