Business development companies (BDCs) have taken a more “defensive approach” in response to a challenging operating environment, according to Morningstar DBRS.

The ratings agency said that, in response to increased redemptions over the past two quarters, mostly from retail investors, many BDCs have been allowing repayments and portfolio exits to outpace new originations. This has enabled them to reposition their investment portfolios and reduce exposure to more challenged borrowers.

While this has resulted in slower portfolio growth, BDCs have preserved liquidity and maintained leverage at manageable levels, the ratings agency said.

One example is BlackRock TCP Capital Corp, which sold 48 per cent of its debt holdings to secondaries investor Pantheon as it sought to address longstanding issues.

“In response to a more challenging operating environment, many BDCs have taken a more defensive approach,” said Anthony Tran, assistant vice president, global non-bank financial institutions at Morningstar DBRS.

“While these actions have resulted in slower portfolio growth and, in some cases, modest portfolio contraction, they help preserve liquidity, maintain leverage within manageable levels, and enhance overall portfolio resiliency.”

Within its commentary, Morningstar DBRS stated that credit performance across BDCs weakened modestly throughout the second quarter of 2026, with average non-accruals increasing to 3.4 per cent of investment portfolios, up from 3.1 per cent in the fourth quarter of 2025.

Morningstar DBRS said that, despite concerns around BDCs’ exposure to the software sector, software exposure did not meaningfully contribute to the rise in non-accruals across its BDC coverage universe.

As of the second quarter, software investments represented an average of approximately 15.7 per cent of BDC investment portfolios at fair value, compared with an industry average of roughly 25 per cent, the ratings agency said.

Despite the slight deterioration in credit performance, Morningstar DBRS said the situation remains “manageable”.

It stated that it does not anticipate a material acceleration in credit performance issues that would pressure credit ratings across its BDC coverage universe, unless the wider economy deteriorates enough to hurt companies’ performance.