Business Development Companies (BDCs) 2Q Earnings Preview: Fundamentals Look Stable but Sentiment Headwinds Persist

Research evidence excerpt

Business Development Companies (BDCs) 2Q Earnings Preview: Fundamentals Look Stable but Sentiment Headwinds Persist

(40% LTV, $50M EBITDA borrower, non-cyclical industry) to price at SOFR

+550 bps or higher.

This was unchanged from 1Q, but materially higher than 6% in 4Q25,

suggesting private credit pricing is expected to remain disciplined.

New money spreads continued to widen modestly in 2Q:

Average broadly syndicated loan spreads (3 year CS Leveraged Loan Index;

used a proxy for direct lending spreads) were 453 bps in 2Q.

This was approximately 10 bps wider than the 1Q26 average, supporting

future portfolio yields as capital is redeployed.

Rate expectations have become more supportive for BDC earnings:

Strong employment trends and persistent inflation concerns have increased

market expectations for additional Fed tightening.

As of June 30, the 3-month SOFR forward curve implied roughly 1.3 rate

hikes by the end of 1Q27.

The curve now implies a ~7 bp cumulative increase through 2026,

compared with expectations for a ~34 bp decline at the end of 1Q.

From the beginning of 2026 through 2027, the curve implies a ~14 bp

cumulative decline, versus a ~54 bp decline implied as of the end of 1Q.

Implications for BDC earnings:

Higher spreads and a more constructive rate outlook is supportive of

earnings stability over the next 12–18 months.

Based on 1Q26 interest-rate sensitivity disclosures:

A 25 bp rate increase boosts average BDC earnings by approximately

2.0%.

A 25 bp rate decrease reduces average BDC earnings by

approximately 2.1%.

Sentiment Headwinds Still Weighing on BDC Valuations

Private credit concerns received less attention during 2Q bank earnings (vs.

1Q), with management teams spending less time discussing credit risk within

private credit and BDC portfolios.