no specifics here
Fitch Wire
BDCs Face New Headwinds but Limited Direct Exposure to Tariff SectorsThu 24 Apr, 2025 - 12:51 PM ET
Fitch Ratings-New York-24 April 2025: The recent escalation in the global trade war and resulting uncertainty across the market introduced additional headwinds for business development companies (BDCs) and private credit in the near term, Fitch Ratings says. We expect additional non-accruals across BDC portfolios in 2025 given the continuation of elevated interest rates and the challenging economic backdrop, including impacts of tariffs on some portfolio companies.
In response to the administration’s evolving tariff policies, Fitch lowered its U.S. annual growth estimate from 1.7% in 2025 to 1.2%, slowing to just 0.4% yoy in 4Q24. Diversified portfolios help mitigate the negative effects from tariffs on asset quality, but the BDC sector is untested by a severe economic downturn.
The impact of tariffs will vary by sector but will likely be a net negative for U.S. corporate issuers. Industries directly impacted by tariffs include global supply chain, manufacturing, and automotive. Industries that will be indirectly impacted include consumer and retail, among others.
U.S.-focused software, business services and health-care-oriented companies, which are often the top industry exposures for BDCs, may be less affected. Fitch recently revised the outlooks for both the global autos sector and the U.S. retail and consumer products sector to ‘deteriorating’ from ‘neutral’. We also view the U.S. technology, homebuilding, and gaming sectors as vulnerable to tariff hikes and/or retaliation by trade partners.
In general, the BDCs have limited exposure to industries that are directly affected by tariffs. However, BDCs face second order effects, especially if a prolonged recession materializes that would pressure portfolio company performance more broadly. BDC’s direct exposure to first-order industries that will be most affected by tariffs, including manufacturing, industrial, distribution and auto, is limited to less than 10% of BDC portfolios, on average, at fair value.
In the following chart, BDC industry exposures are categorized by Fitch’s assessment of the risk of effects from tariffs. Industry classifications vary among BDCs, as some report broad categorizations and most classify software companies by end market when there is an identifiable end market. Therefore, while some BDCs appear to have elevated concentrations in sectors that Fitch classifies as having high tariff effects, utilizing reported industry concentrations can overstate the actual first-order impacts.
Debt maturities will increase in 2025 but have been largely addressed with record issuance of $20.7 billion of unsecured debt in 2024. This year was off to a strong start, with $6.7 billion of issuance through April 18, 2025. Unsecured debt issuance could slow if bond spreads remain wide, hampering BDCs’ ability to get ahead of the upcoming debt maturity wall in 2026.
Fitch’s 2025 sector outlook for BDCs remains ‘deteriorating’, reflecting our expectations for a more competitive underwriting environment, weaker net investment income and dividend coverage, and potential non-accruals and losses amid high interest rates and the challenging economic backdrop. |
