Private credit maturities have lengthened this year as financing conditions have eased. Business development companies (BDCs) and interval funds (nontraded closed-end funds that offer periodic redemptions for a set percentage of outstanding shares), whose assets are majority private credit (see chart 1), have more than halved their private credit maturities for 2024 over the past year (as of first-quarter 2024).

Nonetheless, amid the recent volatility in financial markets, interest rates in the U.S. continue to pressure some smaller and weaker borrowers. While S&P Global Ratings economists now expect the Federal Reserve to begin cutting rates at September's meeting, some investors are concerned the cuts may not be deep enough for borrowers struggling to maintain cash flow and meet interest payments.

After the initial rate cut, we expect a lag before the reduced funding cost eventually reaches the borrowers with loans held by BDCs--probably not before the first quarter of next year. BDCs have already been working with borrowers seeking to conserve cash by temporarily converting interest payments to payment-in-kind (PIK) instead of cash, and we expect PIK income to increase for most BDCs in the next few quarters.

And for both broadly syndicated loans (BSLs) and private credit, debt maturities are rising toward an especially high peak through 2028, with much of this credit borrowed when financing conditions were generally favorable.

This leads some to ask the question: Will sufficient liquidity be available for these borrowers when they look to refinance?

Borrowers Push Out Maturities

With borrowers recently pushing out maturity walls, both public and private credit obligations are appearing more manageable. Near-term maturities have lessened, and borrowers have some time to refinance the larger maturities coming in later years.

Moreover, with the brighter financing conditions this year, BSL borrowers have made progress pushing out maturities as BSL volume surged 140% year over year through June. The majority of this issuance has gone toward refinancings (according to Leveraged Commentary and Data from PitchBook, a Morningstar company).

Funding also shows signs of easing for private credit borrowers. Demand for private credit continues to grow, as shown by North American private credit firms' dry powder increasing nearly 13% since the beginning of 2024 (according to Preqin), bringing the size of the U.S. private credit market to near $1 trillion.

BDCs' Private Credit Maturities Peak In 2028

While debt held by BDCs and interval funds represents just a slice of the $1 trillion U.S. private credit market, these portfolios offer a glimpse of how these maturities are changing. Close to $5 billion in private credit loans held by BDCs is scheduled to mature this year as of first-quarter 2024--55% lower than the 2024 total as of first-quarter 2023. Borrowers have also reduced 2025 maturities by 22% over the past year.

Further out, higher maturities loom. Maturities for private credit held by BDCs and interval funds peak in 2028, when nearly $60 billion comes due. Both new borrowing and the extension of existing debt have contributed to the escalation of 2028 maturities, which are up 33% since first-quarter 2023 and up 119% since first-quarter 2022 (see chart 2).

The upcoming maturity schedule for private credit loans mirrors that of the BSL market, where maturities are also set to peak in 2028.

Chart 2

As in the BSL market, these upcoming maturities appear manageable considering the recent financing conditions. Roughly $155 billion in private credit loans held by BDCs is maturing through 2028, and North American private credit funds had close to $300 billion in dry powder as of July 2024 (according to Preqin). Private credit lenders appear to have more than sufficient liquidity to meet these upcoming maturity demands.

Furthermore, just a small portion of these firms' private credit loans are scheduled to mature in the near term. Just 2.3% of private credit loans are set to mature in the next 12 months, and under 10% are set to mature in the next 24 months (see chart 3).

However, a growing share of BDCs' private credit loans are set to mature in the next five years. This share maturing in the next 60 months rose to near 72% in first-quarter 2024 from 62% in first-quarter 2023.

Chart 3

Leaning In To New Fund Structures

Fund managers continue to roll out new BDC funds and structures to provide ways to invest in the private credit market. For instance, traded BDCs raise equity by selling new shares through the stock market (assuming the stock trades above net asset value), while nontraded BDCs raise capital through unregistered equity offerings.

Meanwhile, interval funds have also shown growth by providing exposure to assets such as private credit, meeting demand from retail investors and advisers.

With the rollout of new structures, nontraded BDCs and interval funds have accounted for the largest share of BDC growth over the past year, while publicly traded BDCs show a much smaller increase. The total value of BDC assets grew 22% year over year to $372 billion in first-quarter 2024. Nontraded BDCs (which include both private and perpetual nontraded) accounted for the largest portion of this growth (up $50 billion, or 39%) , while interval funds showed a higher rate of growth from a smaller base of assets (up $18 billion, or 57%) (see chart 4).

By contrast, assets of publicly traded BDCs declined by 1% over the same period as managers allocated more to newer fund structures.

Chart 4

BDC Assets Remain Concentrated In Private Credit

BDCs were created in the U.S. by an act of Congress in 1980 to provide capital to small and midsize borrowers. Reflecting this mandate, corporate loans (including BSLs and private credit) account for around 82.5% of BDC assets, and the majority, about 57%, are private credit (see chart 5).

Still, BSLs gained share within these portfolios in the first quarter. Whereas BDCs added close to $8 billion in private credit assets in the first quarter, they added more than $11 billion in BSLs.

This increase in BSL holdings could reflect the recent growth in perpetual nontraded BDCs and interval funds. Both are exposed to some redemption risk, although redemptions are capped at 5% of net asset value on a quarterly basis. Many fund managers hold 10%-25% of their investments in relatively liquid BSL holdings.

Because BSLs trade in secondary markets, these holdings can constitute some of the more liquid assets for a BDC to sell, should the need arise. Private credit, by contrast, is largely illiquid and without a secondary market, and fund managers generally plan to hold these assets to maturity.

Chart 5

BDC Portfolios' Funding Costs Have Moderated From 2023 Highs

Financing conditions in the first part of 2024 were broadly supportive for borrowers, even for riskier ones, and this contributed to a moderation in funding costs.

The rise in competition as newer BDCs proliferate and broadly syndicated markets recover has given BDC borrowers an opportunity to refinance and lower their funding costs. This has led to spread compression for upper-middle-market direct lenders, as firms look to deploy dry powder and as sluggish M&A limits investment opportunities.

As a result, private yields have declined over the past two quarters, and the yield premium over BSLs has narrowed. However, between lingering high rates and steady demand from refinancing, BDCs continue to find attractive lending opportunities.

Average yields on private credit loans held by BDCs fell to 10.6% in first-quarter 2024, down 0.5 percentage point since third-quarter 2023. As of the same date, the private premium (the private credit yield minus the BSL yield) had risen to near 113 basis points, but it has subsequently dipped to 86 basis points (see chart 6).

Chart 6

With more capital to deploy, and through partnerships with other lenders on club deals, private credit lenders have been extending credit to larger and larger borrowers. The line between private credit and BSLs has blurred.

While private credit still has a yield premium over BSLs, lenders may offer lower yields to some of the larger borrowers that are now funded through private credit than they would have offered to smaller borrowers--if the lender views the larger size as a reflection of higher credit quality.

Within BDC portfolios, the average borrower size (as measured by the total amount of debt from that borrower that is held across BDC portfolios) has grown over the past year, with increases among both BSL and private credit borrowers. As of first-quarter 2024, the average private credit borrower's loans had grown 7% year over year to $49.3 million. Meanwhile, the average loans of a BSL borrower held by a BDC rose 16% to $60.5 million (see chart 7).

Chart 7

Uncertainty Clouds The Horizon

Financing conditions this year have supported private credit refinancings of near-term debt, but this is adding to maturities down the line, including in the peak year of 2028. With an uncertain economy clouding the horizon, many question whether financing conditions can remain as supportive as they've been in the first half of 2024.

Related Research

• A Cooling U.S. Labor Market Sets Up A September Start For Rate Cuts, Aug. 6, 2024
• Global Refinancing Update Q3 2024: Near-Term Risk Eases, July 29, 2024