The pressure for financial advisors and broker-dealers that sold billion of dollars of high-yield, high-risk nontraded business development companies over the past five years continued to mount this week; on Tuesday, Moody's Ratings revised its outlook on BDCs to negative from stable, according to multiple news reports.
Moody’s cited several factors for its ratings cut, including record redemption pressures, higher leverage and weakening access to funding markets, according to a report from Reuters, which stated that “the pressure falls most acutely on non-traded BDCs, which account for more than 60% of the sector.”
Meanwhile, the ratings giant also slashed outlook for a giant BDC, Blue Owl Credit Income cut, to negative.
“The implications of a Moody’s downgrade itself are that it damages confidence, debt spreads will widen, new issuance more expensive and sporadic, with some issuers shut out temporarily,” said Mark Goldberg, a senior alternative investment and brokerage industry executive and founder of the website Alternative Investments Market Intelligence.
“Nontraded BDCs will experience further erosion in net flows and face pressure on their balance sheets,” Goldberg said. “The predictive outcome is higher debt costs and lower net investment income.”
A spokesperson from Blue Owl did not return a call Wednesday to comment.
Investment management companies have sold nontraded BDCs since the 2008 credit crisis via financial advisors to investors hunting for yield. A recent logjam has been created as investors seek to sell back shares to BDCs in greater amounts than the funds are ready to buy, forcing some clients to get back in line and wait another quarter before redeeming their shares.
Nontraded BDCs and real estate investment trusts do not trade on exchanges, thus creating challenges at times when financial advisors and their clients are looking for liquidity.
Over the past five years or more, some of Wall Street’s most prestigious names in private investments have flooded the market for financial advisors with BDCs; the new wrinkle on the high-yield funds is that they offer greater ability for clients to sell their shares, known as the redemption process, or liquidity.
Many have found that appealing up to now. With financial advisors and clients increasingly worried about the private loan market for technology companies and BDCs owning such loans, clients have been racing for the exits of some BDCs, according to those companies.
Indeed, it’s been a boom to bust market for nontraded BDCs. According to alternative investments fund tracker Robert A. Stanger & Co. Inc., sales of nontraded BDCs in January were $3.2 billion, a decline of close to 40% compared to the previous month and down just under 49% from their all-time monthly high of $6.2 billion raised in March 2025.
“Moody’s is putting a label on what the market has already recognized,” Goldberg said. “The vulnerability is not in the loans yet, but investors exiting before the marks adjust. Investors and their advisors are acting rationally by redeeming and reallocating capital.”
Another executive saw the need for illiquid alternative investments to move towards a variety of liquidity options for advisors and clients looking to shed shares.
“Retail capital has moved into private credit faster than liquidity frameworks have evolved,” said Brian King, CEO of Lodas Markets, a trading platform for alternative investments. “The resulting pressure highlights the need for greater adoption of secondary markets rather than relying solely on redemption-driven liquidity.”
According to the report from Reuters, the redemptions and outflows leave those non-traded BDC funds "more on defense when it comes to deploying additional capital until the current market shift and uncertainty resolve," the ratings agency said.
The non-traded funds raise equity by selling units and shares to retail clients via financial advisors. The BDCs then add leverage and lend to private companies. Such BDCs are “structured to continuously raise capital while offering limited, periodic liquidity to investors,” according to the report.
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