Buying the dip in themselves: BDCs lean into repurchases as credit cracks wider

The first full week of business development companies’ first quarter reporting had something for everyone, regardless of your stance on private credit. 

While our analysis of the initial third of reporting BDCs shows that lenders added only 35 new borrowers to nonaccrual status — an 11% increase from the prior quarter’s total — the inclusion of several large issuers has pushed the aggregate nonaccrual cost basis to $1.3 billion thus far, marking a sequential increase of approximately 20%.

Among the moves to nonaccrual include Medallia (which quickly progressed into the largest private credit restructuring on record), and two dental rollup platforms, a sector Octus has previously flagged for potential stress: Affordable Care Group and Vardiman Black.

Broader performance metrics continue to suggest persistent weakness. Multiple BDCs reported year-over-year declines in investment income and cash flow generation, leading to dividend compression — a trend that appears to be driven by a convergence of tighter spreads, lower base rates, and contracting asset bases.

In contrast, certain BDCs are originating new loans at wider spreads. Management at Golub Capital BDC described the market’s transition from “borrower-friendly” to “lender-friendly” conditions. Although overall activity remains constrained, BDCs on average are reporting spreads on new transactions that are 25 to 75 basis points wider than in prior quarters.

Finally, an increasing use of share repurchases marks a notable shift in management priorities. The rationale appears to be that, with BDCs trading at a persistent 15% to 20% discount to net asset value, buybacks represent the highest-return investment available, provided fair value marks are accurate. This quarter saw a significant number of repurchase announcements: MidCap Financial completed a $107.9 million authorization, Blue Owl Capital executed $35 million in buybacks, and Horizon Technology Finance authorized a $10 million program. Blackstone Secured Lending signaled its intent to use portfolio repayments for repurchases, while Golub prioritized them as an accretive strategy. In one of the most substantial moves, FS KKR announced a $150 million stock tender by a KKR affiliate alongside its own authorization for a one-year, $300 million share buyback program.

Despite some silver linings, the writing seems to be on the wall: stress is rising, income is compressing, and the market is beginning to sort winners from losers. Whether the damage stays contained, or signals something broader, will be the defining question as the rest of Q1 results roll in.