Key takeaways:
- Sentiment around business development companies (BDCs) has rebounded recently, although stock prices continue to reflect questions about reported net asset values (NAVs), while credit investors have required extra compensation.
- Large gaps in how similar loans are marked across BDCs are a reminder that private credit valuations can lag and shouldn’t be taken at face value.
- In the high yield bond market, defaults are happening but in a managed way, with most issuers opting for negotiated restructurings rather than disorderly bankruptcies.
Figure 1: BDC bonds have enjoyed a stronger recovery than BDC equities this year
On the equity side, the debate centers on NAV credibility. Investors remain skeptical of where portfolios are marked, and without better price discovery that skepticism is likely to persist.
Elevated dispersion in marks is part of the problem: For loans held across multiple BDCs, the gap between the most optimistic and most conservative managers exceeds five percentage points (see Figure 2). Rather than providing comfort, that spread signals uncertainty around true asset values and makes it harder for reported NAVs to serve as an anchor – hampering confidence in dividend sustainability and underlying earnings power.
Figure 2: Dispersion in price marks in BDC portfolios remains unusually wide
A parallel in real estate
History offers a useful parallel. In U.S. real estate markets, after the rapid rise in interest rates in 2022–2023, private vehicles diverged sharply from publicly traded real estate investment trusts (REITs), with public markets repricing faster and more aggressively before the two ultimately converged about halfway back toward the baseline.
The lesson is not that equities are immediately “right,” but that when marks are opaque and stale, public markets tend to apply a large – and often persistent – discount until clarity emerges. Figure 3 illustrates this dynamic by comparing cumulative price returns for the S&P 500 REIT Index with the National Council of Real Estate Investment Fiduciaries (NCREIF) Property Index, a proxy for unlevered private real estate returns. Public REITs sharply underperformed their private counterparts from the first quarter of 2022 through the third quarter of 2023, but by mid-2024 the two indices had reconverged.
Figure 3: In 2022–2023, private real estate vehicles diverged sharply from publicly traded REITs
In credit, the story is different. Credit markets can be more anticipatory in some ways, demanding compensation against the risk of asset quality deterioration. To a large extent, this repricing has already occurred, with many BDC bonds trading at spread levels not too far from the index of BB bonds, the top rating tier in the high yield (HY) sector.
From here, further material spread widening would likely require a more acute shock that would most plausibly come from a reassessment of balance sheet liquidity risk, particularly among non-traded BDCs. For now, that risk appears contained and supported by structural guardrails, including fund redemption limits, access to bank credit facilities, the presence of liquid assets in portfolios, and principal payments from maturing loans.
Distressed exchanges remain the norm for U.S. dollar high yield defaults
It has been almost 17 years since investors last experienced a true default cycle – an abrupt rise in financial distress that drives 12-month trailing default rates into the double digits. Since the global financial crisis, default rates have instead followed a stop-start pattern, with two notable but shorter-lived humps: the 2014–2015 episode that followed the onset of the shale revolution (and was largely concentrated in oil and gas), and the COVID shock, which was unusual both in its duration and in the magnitude of the policy response that followed. As Figure 4 shows, since defaults bottomed at the end of 2021, the 12-month trailing issuer-weighted default rate in the U.S. dollar (USD) HY market has been range-bound around its long-run median of 4%.
Figure 4: The USD HY default rate has remained near its historical median for the past few years
Against that backdrop, there were 20 issuer-level USD HY defaults over the first three months of 2026, according to Moody’s data, broadly in line with first quarter default counts in each of the prior three years. Importantly, distressed exchanges continue to account for the majority of default events (11 of the 20 so far this year) – a pattern that has persisted for roughly a decade (see Figure 5). A distressed exchange is an out-of-court restructuring in which an issuer offers creditors new securities or amended terms that are less favorable than originally promised (for example, a maturity extension, coupon reduction, or principal haircut) to avoid a payment default and a Chapter 11 filing.
Figure 5: Distressed exchanges continue to constitute a majority of defaults
The preference for distressed exchanges reflects their typically lower frictions relative to Chapter 11. They can be executed more quickly, with less operational disruption and less headline risk, which can help preserve employee retention and enterprise value.
For investors, these dynamics often translate into higher recoveries than in-court restructurings, although outcomes ultimately depend on the issuer’s capital structure, collateral, and the depth of the underlying business deterioration.
Michael Puempel and Gabriel Cazaubieilh contributed to this report.
