Despite blowout results from the biggest US lenders, fears about the strength of the credit market remain, which is putting a spotlight on upcoming reports from a usually obscure collection of financial firms.
Business development companies, or BDCs, pool private credit loans for a variety of small- and medium-sized businesses that can have a tough time raising money through traditional capital markets. The shares of these firms have taken a hit this year as investors prepare for lower returns following the Federal Reserve’s interest rate cuts.
Fears have also risen over credit quality following the collapses of car-parts supplier First Brands Group and subprime auto lender Tricolor Holdings, and after a pair of banks suffered losses tied to fraudulent loans.
Now BDCs like Blue Owl Technology Finance Corp., Main Street Capital Corp., FS KKR Capital Corp. and Blackstone Secured Lending Fund are set to report results over the next week, giving investors a closer look at the potential credit risks looming over the economy and stock market.
“BDC earnings season is effectively a live stress test of private credit,” said John Cole Scott, president of CEF Advisors. “BDC earnings give more real-time credit data than banks — non-accruals, fair value marks, sponsor behavior, cost of leverage.”
Shares of these companies are badly lagging the overall market this year, with the S&P BDC Index falling 14% while the S&P 500 Index has gained 16%. FS KKR has plunged over 30% in 2025, putting it among the five worst performers in BDC index, while Blackstone Secured Lending is down 18% for the year, Main Street has declined 2.4% and Blue Owl Technology has dropped 14% since it began trading on June 12.
“BDC shares have experienced recent weakness, primarily attributable to rate cut expectations and ongoing credit concerns, drawing increased investor attention,” Jefferies analyst John Hecht wrote in a note previewing the group’s earnings on Oct. 21. “Some BDCs have high exposure to floating-rate assets, making them more vulnerable to rate cuts.”
Publicly traded BDCs have drawn growing investor interest in recent years as private credit has expanded and the sector has matured. Retail investors, attracted by the high dividend payouts, poured into the space as the Fed raised rates in 2022, looking to reap the benefits of the increased cost of lending.
The vehicles also provide valuable transparency into the opaque world of private lending, including information on the underlying health of the portfolio as well as the lenders’ exposure to certain assets.
Private credit has grown into a $1.7 trillion industry since the global financial crisis in 2008, as the US government tightened regulation on commercial lenders to reduce risks. Some banks are now collaborating with private credit firms to earn fees and tap ever-deeper pools of capital.
Skeptics, however, say the combinations are risky and could infect the banking system. JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon told analysts on the bank’s earnings call last month that they should look at the steep discount to book value at which many BDCs are trading.
Short sellers have been getting in on the action. Wagers against the 10 biggest publicly-traded BDCs netted more than $127 million in the 30 days through Oct. 21, meaning “shorts have made all of their year-to-date profit,” according to a report from S3 Partners LLC. Meanwhile, short interest in many lenders has trended down in recent weeks, data compiled by S&P Global Market Intelligence shows.
Still, the early signs for the industry are more encouraging than worrying.
Ares Capital Corp., one of the largest listed private credit vehicles, gave a positive early read on the sector in its quarterly earnings, showing stable credit quality. The “results included strong origination activity and stable credit quality that should alleviate some broader private credit concerns,” Truist analyst Arren Cyganovich wrote in a note to clients on Oct. 28. Ares Capital shares are down 6.8% year to date.
Beyond Dimon, Wall Street titans are largely dismissing credit concerns and casting the recent difficulties as isolated events rather than signs of an emerging crisis. Goldman Sachs Group Inc. Chief Executive Officer David Solomon downplayed the fears in late October, saying he doesn’t see looming systemic risk in the credit market.
© 2025 Bloomberg L.P.
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