BDCs face new pressure. Sales slide. Will values follow?

The dramatic fall off in sales of private credit and loan funds, including nontraded business development companies, has reached a critical point, according to a new analysis by Robert A. Stanger & Co. Inc., with clients redeeming or selling back their shares to nontraded BDC funds outpacing new sales in the first three months of the year by $2 billion.

This is a fresh if painful point in the market for the asset class, which has only seen skyrocketing growth in the past decade, according to Stanger. It’s the first quarter that clients’ redemption of shares of nontraded BDCs, which make loans to private companies, has outpaced sales of new shares to retail investors.

“That’s $2 billion of net capital outflow from BDCs, and if those funds sell their loans in the secondary markets to pay clients’ redeeming shares, who will the buyers be?” asked Mark Goldberg, a senior alternative investment and brokerage industry executive and founder of the website Alternative Investments Market Intelligence.

“It will be institutions, and they don’t like to pay retail prices,” Goldberg said.

“Redemption activity increased meaningfully” in the first quarter, according to Stanger. “BDC sponsors met approximately $6.9 billion of redemption requests, exceeding the $4.9 billion of new capital raised by publicly registered BDCs during the quarter.”

“This marks the first time quarterly outflows have surpassed quarterly inflows,” Stanger reported.

Ill winds continue to buffer nontraded REIT sponsors.

Moody's Ratings in April revised its outlook on BDCs  to negative from stable.

The ratings company cited several factors for its ratings cut, including record redemption pressures, higher leverage and weakening access to funding ‌markets, according to a report from Reuters, which stated that “the pressure falls most acutely on non-traded BDCs, which account for more than 60% of the sector.”

Meanwhile, the ratings giant also slashed outlook for a giant BDC, Blue Owl Credit Income cut, to negative.

“Fundraising has slowed, redemptions have risen, and for the first time, more capital left non-listed BDCs in a quarter than came in,” wrote Stanger’s chairman and CEO, Kevin Stanger, Thursday morning in a research note.

“But the structures are functioning as designed: sponsors delivered a record level of liquidity in” the first quarter, and no net asset value BDC “has gated redemptions,” Gannon noted. “As we saw with NAV REITs in 2022, these vehicles were built to manage periods of elevated redemptions, and Q1 showed that the structure can absorb meaningful liquidity pressure.”

While product sponsors are providing liquidity and buying back shares from retail investors, Goldberg noted that BDC funds’ price per share or NAV would be the next concern for the market.

“If this gets acute, say for an individual fund that becomes a seller of loans, what will that fund’s NAV be?” he asked.  

“That’s the last leg of this current cycle of stress for BDCs,” he said. “If many firms are in a position of selling loans at the same time, then how steep a discount do all the BDCs have to sell them for?”