Investors in the corporate bond market are imposing noticeably different risk premiums on private-credit firms, with smaller business development companies (BDCs) generally trading at wider spreads than their larger counterparts, according to an analysis of recent issuance and market data.
The divergence in pricing highlights growing selectivity among bond buyers as borrower stress has risen following a prolonged period of elevated interest rates. Market participants say judgment of BDCs is increasingly focused on portfolio composition, scale and access to financing.
How the spreads stack up
Using LSEG data, the analysis found BCP Investment Corp recorded the highest weighted average option-adjusted spread (OAS) in the sample at 680 basis points. Prospect Capital Corp followed at 449 basis points, Trinity Capital Inc at 403 basis points and Fidus Investment Corp at 392 basis points. OAS measures the additional yield investors require over Treasuries after adjusting for features such as call options.
By contrast, several larger BDCs and private-credit vehicles had spreads clustered in a much narrower range - roughly 150 basis points to 200 basis points. Names in that tighter group included Ares Capital Corp, Blackstone Secured Lending Fund, Blue Owl Capital Corp and Golub Capital BDC.
Drivers of dispersion
Higher spreads can reflect robust demand for yield in the market, but they can also signal investor concerns about credit quality or funding risk at particular issuers. Market observers point to a few specific factors now shaping investor decisions.
- Scale and capital access - Larger managers with deeper balance sheets and broader capital sources are generally earning narrower spreads.
- Portfolio quality and sector exposure - BDCs with greater exposure to sensitive sectors, notably software-as-a-service (SaaS) companies, are being scrutinized more closely and may trade at wider spreads.
- Recent volatility and downgrades - Some participants expect further differentiation as downgrades or greater interest-rate volatility play out.
"There’s dispersion in BDC equity, but it’s still limited in BDC bonds given strong demand for carry in this environment," said Aditya Aney, co-founder of Andromeda Capital Management in London. He added: "However, we think this will change over the coming months triggered by downgrades, higher or more volatile rates and greater focus on sector (SaaS) exposures."
Scope and methodology of the analysis
The review covered 884 bond issues from 41 BDCs, including only bond offerings of at least $50 million for which comparable issuance data was available. Issuer-level spreads were calculated by weighting each bond’s OAS by its issue amount, providing a size-adjusted view of market-implied risk premia across lenders.
Changes in weighted-average spreads over the period covered by the dataset were notable for several issuers. Trinity Capital’s weighted average OAS widened by 140 basis points, Fidus by 92 basis points and Prospect Capital by 85 basis points. BlackRock TCP Capital’s spread rose by 40 basis points, while Goldman Sachs BDC, Golub Capital, Blue Owl Technology Finance and Blue Owl Capital saw increases in the 20 to 31 basis-point range.
Other issuers showed different dynamics: Ares Capital’s spread was little changed, while Sixth Street Specialty Lending, Hercules Capital and Morgan Stanley Direct Lending experienced modest tightening.
Broader market context
This growing selectivity among bond investors is occurring against a weaker private-credit backdrop. Data tracked by Fitch Ratings show the default rate among U.S. private-credit borrowers hit 6% in the 12 months through April, the highest level since the dataset began being tracked in August 2024. Fitch also moved its outlook on Goldman Sachs BDC to negative, citing recent portfolio credit deterioration and a low asset-coverage cushion.
That combination of rising defaults and targeted investor scrutiny is contributing to the widening gap in pricing between smaller, potentially more vulnerable lenders and larger, more established names in the private-credit space.
Implications for markets and sectors
- Credit markets - Increased dispersion in BDC bond spreads signals more granular credit differentiation among lenders.
- Middle-market lending - Borrowers served by smaller BDCs may face higher funding costs as markets demand greater compensation for perceived risk.
- Technology sector exposure - BDCs with concentrated exposure to SaaS and related software companies are receiving greater investor scrutiny.