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.