US private credit firms mark down more loans

U.S. private-credit portfolio values showed signs of stabilising in the second quarter after a broad deterioration early in 2026, according to a Reuters analysis, though lenders continued to mark down select software loans and reported a rise in debt that has stopped generating income. The analysis of regulatory filings from 44 U.S. business development companies, which lend mainly to small- and medium-sized firms, found that the combined fair value of their investments was $92.88 billion on June 30, against $95.19 billion of reported cost or amortized cost. At the end of 2025, fair value stood at $95.82 billion against a cost of $96.54 billion. The aggregate fair-value-to-cost ratio fell to 97.77% in the first quarter from 99.25% at end-December, and eased further to 97.57% in the second quarter.

Most broad markdowns occurred in the first quarter, while second-quarter losses at several prominent BDCs were concentrated in a relatively small number of borrowers. Chris Cessna, managing director at Houlihan Lokey's Portfolio Valuation and Fund Advisory Services, said the 168-basis-point decline over the first half was materially larger than typically observed, adding that "in stressed loans, weaker borrower fundamentals are contributing to lower marks." Data he cited showed BDCs had written down 81% of software loans this year, compared with 40% outside the sector. About 4% of all borrowers had loans marked below 80% of par, up from around 1% from 2023 through 2025.

Clay Montgomery, a vice president in Moody's Ratings' financial institutions group, said a narrow group of investments accounted for an outsized share of unrealized losses at several prominent BDCs. Blue Owl Capital Corp. said its second-quarter net asset value decline was driven primarily by one credit-specific markdown, whereas roughly three-quarters of its first-quarter decline reflected a broader widening of spreads. At Ares Capital Corp., two software companies accounted for just over a third of year-to-date net unrealized losses of $527 million, according to a filing, rising to more than half when five further software companies are included. Golub Capital BDC's losses were concentrated in a small number of junior debt and equity positions, and FS KKR Capital Corp. said a handful of investments accounted for a substantial majority of its markdowns.

Non-accrual investments, where borrowers are significantly behind on payments or considered unlikely to pay, rose across 10 BDCs with comparable filings to about 3.4% of portfolio cost at end-June from 2.5% at end-2025. Sundar of J.P. Morgan Private Bank said, "What we are seeing is largely a repricing," citing weaker deal flow, redemption pressure at non-traded funds, softer sentiment, concerns over AI-driven software disruption and near-term debt maturities. Private credit has faced heightened scrutiny this year over opaque valuations, redemption pressure at some non-traded funds and weakening borrower performance, particularly in software.