High Yield & Loan Strategy: BDC stress tests – when does the clock run out?

Research evidence excerpt

High Yield & Loan Strategy: BDC stress tests – when does the clock run out?

The countdown begins

BDC equities erase April recovery amid Q1 earnings

This month’s correction in BDC equities has erased the entire April recovery, sending

levels back to March - when the BDC index fell 20% due to AI disruption and redemption

risk. Q1 earnings have brought back to focus concerns around credit health, returns, and

what that means for BDC redemptions. That said, the angst has largely been around

equities, while bond spreads have retraced back to Feb levels (Exhibit 1). This is because

1) platform-level liquidity risk takes time to transform to true credit risk 2) BDCs are

only levered ~1x and have a large equity cushion to absorb expected credit losses.

Exhibit 1: BDC bonds vs. BDC equities

BDC equities have erased their April recovery while bonds have retraced back to Feb levels

130 1.1

BDC Bonds (OAS, inverted) BDC Equities (Price to Book, RHS)

150 1.05

170 1

190 0.95

210 0.9

230 0.85

250 0.8

270 0.75

May-25 Jul-25 Sep-25 Nov-25 Jan-26 Mar-26 May-26

Source: BofA Global Research, Bloomberg

BofA GLOBAL RESEARCH

In this report, we deep dive into Q1 BDC earnings from the vantage point of two key

aspects of performance: fundamentals and liquidity. Using publicly available data, we

compare BDC-level fundamental health as well as liquidity dynamics to highlight the

immense dispersion that afflicts the space. For Pvt unlisted BDCs, where liquidity

concerns are the most pronounced given redemption risk, we provide hypothetical BDC-

level runways in terms of quarters, after which pressure could start bleeding into

portfolio performance. Our hypothetical runways are calculated based on all publicly

available sources of capital - such as cash, credit lines, expected paydowns, and par