- Lenders are seeing the same loans differently. The share of borrowers held by two or more US business development companies whose marks differ by five points or more rose to 12.3% as of June 30 from 9.3% a year earlier, according to research by the Frankfurt School of Finance & Management reported by Bloomberg.
- More loans are marked down. About one in 10 private credit loans held by BDCs are now marked below 90% of face value, up from 7.7% last year.
- The gap is a warning sign. Report author Sascha Steffen said the variation shows some managers have effectively downgraded borrowers, and that if the share is rising “it’s usually a signal that there’s actually something wrong.”
- Marks can lag reality. Steffen said private credit managers are paid fees based on net asset value, so “they have an incentive not to value this correctly, so the marks will respond relatively late.”
What Happened?
The Frankfurt School team analyzed public filings to the Securities and Exchange Commission by US business development companies, the publicly reporting vehicles that hold private loans to midsize companies. By comparing how different managers valued loans to the same borrower, the researchers found that wide disagreements became more common over the year to June 30, alongside a rise in loans marked below 90 cents on the dollar.
Why It Matters?
Valuation disagreements are one of the clearest symptoms of private credit’s opacity, and they matter because investors rely on these marks to judge risk and returns. Unlike in public corporate bond markets, where prices move with stress, markdowns in private credit can appear with a lag even after problems emerge. A rising share of conflicting marks suggests credit quality is deteriorating for some borrowers before all managers recognize it, which could mean more losses ahead for BDC investors.
What’s Next?
Watch upcoming BDC filings for further increases in loans marked below 90% of face value and wider gaps between managers’ marks on the same borrowers. Investors will also look for any regulatory push for more consistent valuation practices, and for signs that markdowns are catching up with the stress some lenders have already flagged.
Affected Tickers and Coins: BIZD, VPC, HYG
Source: Bloomberg
