By Bill Alpert
Interest profit margins narrowed again on loans made by publicly traded credit funds. That shows how much private credit money is competing for a declining number of deals.
The margin between the rates funds can charge on loans and the rates they themselves pay for money is called the spread. Spreads on new loans dipped by about 0.15 to 0.25 of a percentage point in the December quarter, to 5.23%, reports Raymond James analyst Robert Dodd in a Monday analysis.
That casts a different light on headlines about investors pulling money from credit funds. Less money chasing deals could be a positive for the industry's spreads.
Spreads reflect the supply and demand for credit. While individuals poured money into the lending funds known as business development companies (or BDCs) over the past five years, the number of private equity deals the funds could lend to remained fairly flat. Credit funds competed for desirable deals by reducing their spreads and offering noncash interest payment, known as payment-in-kind (or PIK), where a quarter's interest gets added to the loan balance.
"If onboarding spreads do not widen, we believe there is still room for modest incremental portfolio spread compression to generate an earnings headwind for BDCs through 2026," Dodd says.
Among the publicly traded BDCs that Dodd follows, new loan volumes declined moderately in the December quarter. Not only did spreads narrow as funds competed for those deals, but noncash PIK interest was more common.
PIK terms have become a feature of lending in the past five years, notes Dodd, particularly in loans by the largest funds like Ares Capital and Blue Owl Capital. Such noncash interest coupons show up in 8% of new loans today, compared with 3% in 2019.
As lower-spread new loans replace higher-spread old loans in fund portfolios, the overall yield on those portfolios edges down. Overall spreads in the industry's portfolios were 5.64% in the December quarter, down by 0.34 percentage points from 5.98% in the December 2024 quarter.
The industry trend appeared in the December results for particular BDCs. At the biggest public BDC, Ares Capital, the average yield on new loans in the quarter was 8.5%, compared with a yield of 10% on loans that were repaid or exited. In other words, new loans yielded less than older loans.
At Blue Owl Capital, the second-largest public BDC, the fund charged 8.7% on new loans in the December 2025 quarter, compared with 9.5% in the year-earlier quarter. Its spreads on those new loans narrowed to 4.8%, compared with 5.2% a year before. As newer loans replace higher-yielding older loans, the Blue Owl BDC's spread on its total portfolio narrowed to 5.7%, from 6%.
Narrower spreads, along with the decline of interest rates generally, should be expected to reduce the dividends that BDCs pay out -- and they have. As dividends drop from the elevated levels at the top of the interest rate cycle, it is rational for investors to pull back from private credit.
Write to Bill Alpert at william.alpert@barrons.com
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(END) Dow Jones Newswires
March 23, 2026 13:04 ET (17:04 GMT)
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