The hidden worries in the US credit market have not disappeared, with BDC financial reports becoming a "risk examination report".

Despite the outstanding performance of large loan institutions in the United States, doubts about the stability of the credit market have not dissipated, making the upcoming financial reports of a group of usually overlooked financial companies a focus. Business Development Companies (BDC) specialize in aggregating private credit resources for various small and medium-sized enterprises, which often struggle to finance through traditional capital markets. Many BDCs, including Blue Owl Technology Finance (OTF.US), Main Street Capital (MAIN.US), FS KKR Capital (FSK.US), and BlackStone Secured Lending Fund (BXSL.US), will release their financial reports starting this week. These financial reports will allow investors to more clearly examine potential credit risks in the economy and stock market. Following the bankruptcies of auto parts supplier First Brands Group and subprime auto lender Tricolor Holdings, as well as losses suffered by two banks due to fraudulent loans, concerns about credit quality in the market have continued to escalate, leading to a decline in the US stock market in mid-October. John Cole Scott, President of CEF Advisors, stated, "The latest financial reports of BDCs essentially serve as real-time stress tests for private credit. Compared to banks, BDC financial reports can provide more timely credit data including loan delinquencies, fair value measurements, issuer behavior, and leverage costs." Investors' expectations of lower returns after the Federal Reserve's rate cuts have caused underperformance of BDC-related companies' stock prices compared to the overall market this year. Data shows that year-to-date, the S&P BDC Index has fallen by 14%, while the S&P 500 Index has risen by 16%. Among them, FS KKR Capital has fallen by over 30% year-to-date, making it one of the worst performing companies in the S&P BDC Index. Additionally, BlackStone Secured Lending Fund has fallen by 18% this year, Main Street Capital has fallen by 2.4% this year, and Blue Owl Technology has fallen by 14% this year. Jefferies Financial Group Inc. analyst John Hecht wrote in an industry financial report preview on October 21, "The recent weakness in BDC stock prices is mainly due to rate cut expectations and ongoing credit concerns, attracting more investor attention." "Some BDCs hold a large amount of floating rate assets, making them more susceptible to rate cut impacts." In recent years, with the expansion and maturation of the private credit market, publicly listed BDCs have continued to attract investor attention. During the expected rate hike by the Federal Reserve in 2022, retail investors attracted by high dividends surged in, hoping to benefit from rising loan costs. These institutions also provide valuable transparency to the opaque private lending sector, including the health status of underlying portfolio assets and loan institutions' exposure to specific assets. Since the 2008 global financial crisis, as the US government has strengthened regulation of commercial loan institutions to reduce risks, private credit has grown into a $1.7 trillion industry. Some banks are now partnering with private credit companies to earn fees and access larger capital pools. However, critics argue that such partnerships carry risks that could spill over into the banking system. JPMorgan Chase CEO Jamie Dimon suggested in last month's earnings call that analysts should pay attention to significant discounts in many BDC transaction prices relative to book value. Short-selling institutions have also begun to take action. According to a report by S3 Partners LLC, net profits from shorting trades on the top ten listed BDCs exceeded $127 million in the 30 days ending on October 21, meaning that "short sellers have realized full-year profits." However, S&P Global, Inc. market data shows that short positions in several loan institutions have been trending downwards recently. Despite this, early signals in the industry are more encouraging than worrying. One of the largest publicly listed private credit institutions, Ares Capital Corp. (ARCC.US), delivered positive signals in their quarterly financial report, indicating stable credit quality. Truist analyst Arren Cyganovich pointed out in a client report on October 28, "Ares Capital Corp's financial report shows strong lending capacity and stable credit quality, which should alleviate some common concerns about private credit." Apart from Dimon, most Wall Street giants choose to downplay credit concerns, viewing recent troubles as isolated incidents rather than warnings of a crisis. Goldman Sachs Group, Inc. CEO David Solomon refuted these concerns in late October, stating that he did not see any imminent systemic risks in the credit market.