By Bill Alpert

Worries about loan defaults have crushed the shares of business development companies, those nonbank lenders that are Everyman's way of playing private credit. In the past year, the average BDC stock valuation sank from 103% of book value, to 85%.

Public fear over the sector's loans is overblown, say many industry analysts, but declining interest rates will continue to weigh on BDC stocks. Most BDC loans have floating interest rates that rise or fall with some reference base rate. When rates fall, so do interest payments.

"Base rates are likely to decline, and so will BDC earnings (and dividends)," wrote Raymond James analyst Robert Dodd, after hosting a BDC investment conference last week. Attendees expect defaults to rise modestly, but not spike.

UBS analyst Doug Harter thinks those industry headwinds will prevail through 2026. In a recent note he says the BDC sector's past selloffs -- in 2015, during Covid-19, and in 2022 -- lasted 11 months, on average.

In their loans to small and midsize businesses, BDCs charge about 5% above short-term benchmarks like the Secured Overnight Financing Rate. Earnings and dividends swelled in years when base rates rose. Now they are declining. None of that was really the BDCs' doing.

Harter thinks that most of the BDCs he covers will trim their dividends this year, and that earnings will reach their low point in 2027.

Credit quality problems have been spotty, not systemic, notes Dodd. In the four quarters through September, new defaults actually declined more than 25%, compared with the preceding four quarters.

Given the inhospitable conditions they foresee, each analyst only has a few favorites -- even at today's low valuations. Dodd has Outperform ratings on Blue Owl Capital and Sixth Street Specialty Lending. Harter has Buys on Trinity Capital and the small-cap Runway Growth Finance.

Write to Bill Alpert at william.alpert@barrons.com

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January 14, 2026 16:04 ET (21:04 GMT)

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