Stressed first-lien loans held by business development companies nearly doubled this year to $47 billion. At the same time, redemption caps have spread well beyond the largest wealth-channel funds.
Private credit is being tested from two directions at once. More of the loans inside the funds are showing strain, and more of the investors in those funds want their money back.
The loan side first. Of the roughly 5,000 companies held by business development companies a year ago, 583 showed some degree of credit pressure as of June 30, according to an industry analysis of more than 180 BDCs. That count rose 8% from March and 25% from the end of 2025.
The dollars are climbing faster than the names. The volume of first-lien term loans and unitranche loans under pressure rose 92% from the end of 2025 to $47 billion, as larger borrowers joined the watchlist.
Software stands out. The sector accounts for 36% of BDC investments under pressure, measured at fair value, compared with 22% of the BDC universe overall.
The strain has not yet turned into widespread missed payments. Roughly half of the 583 companies on the watchlist at the end of June had not used payment-in-kind interest in the previous 12 months, meaning they were still paying lenders in cash rather than adding the interest to the loan balance.
Now the investor side. Quarterly redemption limits, typically set at 5% of shares, are now binding at a growing list of non-traded BDCs. Ares Strategic Income received redemption requests equal to 14.4% of shares in the second quarter, after 11.6% in the first, and paid out at its 5% cap both times. About two-thirds of the second-quarter requests came from investors who had already asked in the first quarter, which means much of the demand is a queue rather than new selling. Barings Private Credit Corp. received requests for 11.3% of shares in the first quarter against its 5% limit.
In the second quarter, non-traded BDCs managed by Morgan Stanley, Apollo, HPS, Cliffwater, Monroe and Blackstone all received elevated redemption requests and all held repurchases at the 5% limit. Blackstone's BCRED has now capped withdrawals for three straight quarters, with requests of 7%, 10% and 10% of shares in the first three quarters of 2026.
Fitch Ratings has offered a counterweight. In June, it said non-traded BDCs "have adequate liquidity to manage investor redemption requests over the next 12 months." Chelsea Richardson, a senior director at Fitch, pointed to average leverage of 0.85 times across the eight perpetual non-traded BDCs the agency rates, well below a 2.0 times threshold, and said leverage would rise only to 1.39 times in a stressed scenario with no new inflows.
The two measures answer different questions. Fitch's analysis addresses whether the funds can meet their stated redemption policies without being forced to sell loans. The watchlist data address whether the loans themselves are holding up. A fund can have ample liquidity to honor a 5% cap while the share of stressed borrowers in its book rises.
Goldman Sachs Private Credit Corp., a newer fund still raising fresh capital, remains an exception to the redemption pattern.
The next data points arrive with third-quarter reporting. Watchlist counts, the share of software borrowers under pressure and the use of payment-in-kind interest will show whether stress is spreading inside the loan books. Tender results, including Barings' offer that expires Sept. 30, will show whether the redemption queue is shrinking or still growing.