LONDON, May 29 (Reuters) – A Reuters analysis of first-quarter regulatory filings by private credit lenders showed paper losses deepened, underscoring market concerns this year over the sector’s profitability and risks from AI disruption.
The Reuters analysis of 51 business development companies, or BDCs, showed aggregate unrealised losses equalled 2.35% of their net asset value in the first quarter of 2026, the steepest quarterly hit since the second quarter of 2022.
Analysts at BofA Global Research drew a similar conclusion: there is a modest but unmistakable credit deterioration across the BDC complex and assets under management are not growing much.
Fundamentals were weaker in portfolios, with BDCs in their sample reporting more earnings contraction than growth, stable to rising leverage, and uneven coverage metrics, they said.
“For investors, this argues against complacency: seasoning and slowing AUM growth are likely to expose more underlying stress over time, in our view,” they wrote.
The Reuters study of filings with the U.S. Securities and Exchange Commission also showed BDCs received more interest income in kind, rather than cash.
Payment-in-kind, or PIK, allows borrowers to defer cash interest by adding it to debt balances, but it can be a sign of stress. Reuters found identifiable PIK interest income totalled about $477 million in the quarter, up 2% from the previous quarter but below the early-2025 peak of about $633 million.
The European Central Bank, meanwhile, said in a report this week that the euro zone is not facing systemic risk from the recent turbulence in private credit markets, but a few pockets of the financial system are exposed and some tension may already be visible. It warned about interest payments too.
“The ability of private credit-backed firms in the euro area to service interest payments from operating cash flows has deteriorated in recent years,” the bank said. “This trend can also be observed among firms funded through broader leveraged loan and high-yield bond markets, while it is absent for firms relying on bank loans.”
Apollo Global Management’s President Jim Zelter expects wealthy individuals to keep trying to withdraw their money from some private credit funds after several months of outflows from the vehicles.
“I don’t think it was a one-shot,” Zelter said at the Bernstein Strategic Decisions Conference in New York, referring to the redemptions.
While the funds’ underlying performance was “solid” in March, April and May, he said he would not expect a “dramatic decrease” in the rate of people trying to exit, as managers of those funds typically offer to buy back up to 5% per quarter.
He said there “may be even a little bit of an increase if people want to game the system,” and added, “we are not through the turbulence yet.”
(Compiled by Vidya Ranganathan: Editing by Gus Trompiz)
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