Headwinds have become “increasingly evident” in business development companies (BDCs), with selective credit issues becoming more prevalent and non-accrual investments increasing, according to ratings agency KBRA.

Credit stress became more visible in the second quarter of 2026, particularly among non-perpetual-life BDCs, where median non-accrual investments increased to 2.75 per cent of total investments at cost, up from 1.81 per cent in the first quarter, according to KBRA’s quarterly analysis of BDCs.

However, deterioration remains concentrated among a relatively limited number of borrowers and managers, the ratings agency said.

“While broader valuation pressures and heightened concerns surrounding credit quality deterioration and artificial intelligence (AI)-related disruption moderated during the second quarter of 2026, selective credit issues became more prevalent across the sector, contributing to another sequential increase in non-accrual investments,” KBRA said.

“However, across non-perpetual-life BDCs, the data remains more consistent with a normalisation of credit conditions following an extended period of historically benign credit performance, accompanied by increasing differentiation among borrowers and managers, rather than broad-based credit deterioration.”

KBRA added that BDC income remains under pressure as interest rates are lower than they were in 2025, loan spreads are tighter and merger and acquisition and refinancing activity has slowed.

However, the income pressures appear to be driven by the market environment rather than being evidence of broader credit deterioration, the ratings agency added.

Another finding from KBRA’s analysis was that leverage has remained broadly stable for non-perpetual-life BDCs, although some have seen increases due to weaker asset quality. While for perpetual-life vehicles, leverage increased modestly as capital deployment and, for certain issuers, shareholder redemptions, outpaced debt repayment.

The findings come as elevated redemptions from BDCs spilled over into the second quarter of 2026, following concerns over lending standards in private credit and growing fears that AI could undermine the software sector, an area to which the asset class has significant exposure.

KBRA’s analysis encompassed 35 rated BDCs, including both published and unpublished ratings.

Read more: BDCs turn defensive amid redemption pressure