Blog Post
Octus on Credit: BDC non-accrual loans hit $6.72B in Q3
Mark Fischer, Head of Financial Research, Americas
As markets search for signs of stress in private credit, Octus has focused on loans held by business development companies (BDCs) to identify key warning signals—particularly the uptick in nonaccrual loans during the third quarter. These loans, which BDCs believe are unlikely to make future interest payments, increased 12% sequentially to $6.72 billion, representing approximately 1.51% of total BDC investment cost. Octus’ latest report covered all publicly and privately traded BDCs, identifying over 260 loans on nonaccrual status in the third quarter.
Given concerns over consumer spending, loans to consumer discretionary companies had the highest share of debt in nonaccrual status, with the largest sequential increase in the third quarter. Within this sector, a number of automotive companies entered nonaccrual status, headlined by First Brands, but the list also included Covercraft, a maker of seating covers, Continental Battery, a distributor of automotive batteries, and Superior Industries, which makes wheels.
Information technology and healthcare also had high levels of loans on nonaccrual status.
By the time loans enter nonaccrual status, BDCs have likely already lowered fair values associated with those loans; Octus’ analysis confirms that BDCs wrote down fair value by more than 15% sequentially. Automotive remains prevalent on the write-down list, along with companies that produce or support the studio entertainment industry and distribution and logistics service providers.
Entering nonaccrual status is typically a one-way ticket to an eventual restructuring or distressed sale: only 15% of loans on nonaccrual status in the second quarter were removed from the list in the third quarter. Nearly all of these loans were restructured or saw a sale of the underlying assets at distressed levels—findings consistent with nonaccrual loans removed in the second quarter. More than half were restructured out of court, typically through debt-for-equity exchanges and maturity extensions.
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