By Patturaja Murugaboopathy

May 21 (Reuters) - Bond investors are assigning diverse risk premiums to U.S. private credit firms, with smaller lenders being priced at greater risk and hence wider spreads than larger funds, a Reuters analysis shows.

The split highlights growing selectivity in a market facing rising borrower stress after years of elevated interest rates.

Business development companies (BDCs), which lend mainly to middle-market companies and often fund themselves in public bond markets, are being judged increasingly on portfolio quality, scale and access to capital.

BCP Investment Corp ( BCIC ) had the highest weighted average option-adjusted spreads (OAS) in the sample at 680 basis points, followed by Prospect Capital Corp ( PSEC ) at 449 bps, Trinity Capital Inc ( TRIN ) at 403 bps and Fidus Investment Corp ( FDUS ) at 392 bps, as per LSEG data.

OAS reflects the extra yield investors demand over Treasuries after adjusting for features such as call options. Higher spreads can reflect market demand or, in some instances, concerns about credit quality or funding risk.

Larger names including Ares Capital Corp ( ARCC ), Blackstone Secured Lending Fund ( BXSL ), Blue Owl Capital Corp ( OBDC ) and Golub Capital BDC ( GBDC ) had spreads clustered between roughly 150 bps and 200 bps.

The divide in spreads has widened this year, with investors starting to differentiate BDCs more exposed to AI disruption in software-as-a-service (SaaS) companies.

"There's dispersion in BDC equity, but it's still limited in BDC bonds given strong demand for carry in this environment," said Aditya Aney, co-founder of Andromeda Capital Management in London.

"However, we think this will change over the coming months triggered by downgrades, higher or more volatile rates and greater focus on sector (SaaS) exposures," he said.

The Reuters analysis reviewed 884 bonds issued by 41 BDCs, and included bond issues of at least $50 million for which comparable issuance data was available. Issuer-level spreads were calculated by weighting each bond's OAS by its issue amount.

Trinity Capital's ( TRIN ) weighted average OAS widened 140 basis points, while Fidus widened by 92 bps and Prospect Capital ( PSEC ) by 85 bps. BlackRock TCP Capital's ( TCPC ) spread rose 40 bps, while Goldman Sachs BDC ( GSBD ), Golub Capital, Blue Owl Technology Finance and Blue Owl Capital saw increases of between 20 bps and 31 bps.

Ares Capital's ( ARCC ) spread was little changed, while Sixth Street Specialty Lending ( TSLX ), Hercules Capital ( HTGC ) and Morgan Stanley Direct Lending showed modest tightening.

That selectivity comes against a weaker private-credit backdrop.

The default rate among U.S. private-credit borrowers tracked by Fitch Ratings hit 6% in the 12 months through April, the highest since Fitch began tracking the data in August 2024.

Fitch separately changed its outlook on Goldman Sachs BDC ( GSBD ) to negative, citing recent portfolio credit deterioration and a low asset-coverage cushion.