One in five BDC loans marked below 90 falls into nonaccrual within 15 months

Q1’26 stress concentrates in large-cap and software-heavy funds, while lower middle market lending holds firm. Here is what a fund-by-fund view reveals that a sector average hides.

Business development companies, or BDCs, are the one corner of private credit that reports its holdings publicly. That makes them the clearest window the market has into where credit stress is building. We rebuilt the sector from the bottom up, all 174 funds, and reconciled how every lender marks the same names. Routine markdowns are flashing early warnings, the building stress sits in large-cap and software-heavy funds rather than across the market, and reported nonaccrual rates run well below the sector’s true exposure.

The analysis lands amid intensifying scrutiny of how private credit managers value illiquid loans. At the center sits a single question: why lenders value the same loan so differently. When one fund carries a position near par and another marks the identical loan at a fraction of it, the gap stops being a modeling nuance. It moves the fees a manager earns, the prices investors get and the leverage a fund reports.

Octus® has been measuring that gap directly. By reconciling how every lender marks the same names across the sector, we show where the divergence sits, fund by fund, and put a number on it: nonaccruals that run about 60% higher once normalized than reported figures suggest. While the market debates whether private credit marks can be trusted, we already produce the reconciled number.

Reported nonaccruals are the floor

Aggregate BDC debt nonaccruals reached $9.98 billion at cost in Q1’26, or 2.01% of aggregate debt investments, a 40% jump from Q4’25. Once we normalized across all lenders holding the same names and counted every tranche of debt, exposure rose to $16.04 billion and the rate climbed to 3.24%, about 60% higher. At fair value, the normalized rate is more than double the reported figure. We produce this by reconciling how every lender marks the same names across each fund, a bottom-up rebuild of all 174. See the Q1’26 nonaccrual data in our latest BDC roundup.

A routine markdown is an early warning

We tracked loans priced between 90 and 95, a level most of the market treats as routine, and found 13.8% fell into nonaccrual within 15 months. For loans priced below 90, that rate climbed to 20.2%. The signal is already flashing at scale. In a single quarter, 135 borrowers saw roughly $9 billion of principal marked down more than 15%, with the top 20 names accounting for two-thirds of the total. The detail sits in our Q1’26 BDC fair value change analysis, and our Q2’26 Capital Solutions Pipeline maps where impaired facilities cluster against the maturity wall.

The stress is concentrated, not systemic

Large-cap BDC nonaccrual rates jumped 72% in Q1’26, and software-heavy funds more than doubled. Lower middle market funds held firm, with fair value marks flat sequentially at 99.2% and net equity inflows in the quarter. Much of the pain traces to a handful of large-cap and software names, and some to exposure outside core private credit. That concentration is the point. It is precisely why a single sector average misleads, and why the fund-by-fund view matters for allocators reading their own book.

“Averages are hiding two very different markets. Funds concentrated in large-cap and software credit are absorbing real stress. Funds lending to the lower middle market have seen less credit deterioration. A single private credit nonaccrual rate blurs both. For allocators, the industry average tells you very little. What matters is exactly what sits inside the book you own, fund by fund.”

Kent Collier, founder and CEO of Octus

“Every markdown matters. Even loans priced in the low 90s, a level most would call routine, fell into nonaccrual nearly 14% of the time within 15 months in our analysis. Stress is building, and I believe the nonaccrual rate will keep climbing. The watch item from here is recoveries. They’ve averaged around 50% in private credit, but we’re seeing repeat restructurings on the same credits. If that continues, ultimate recoveries could fall well below what the market currently assumes.”

Mark Fischer, Head of Financial Research at Octus

The fund-by-fund view

BDCs represent the only corner of private credit that reports portfolio-level holdings publicly. We cover all 174, whether publicly or privately traded, giving lenders and allocators a fund-by-fund view of what each holds, how peers mark the same assets and where nonaccruals are building. The sector average will tell you the market is fine. The book you own may tell a different story.

Subscribers can explore our full private credit coverage, including the latest league table rankings and analytics. Our Q2’26 BDC analysis follows later this quarter.