Business development companies (BDCs) now finance roughly a quarter of middle‑market private credit, yet they rely heavily on debt—about half of a median BDC’s assets are debt‑financed. A new note by Sharjil Haque and Jessie Wang of the Federal Reserve examines BDC borrowing from banks, using FR Y‑14Q Schedule H.1 loan‑level data. The research shows that outside tightening periods, BDCs and non‑BDCs pay similar loan rates when controlling for internal bank credit assessments. However, as the Fed raises rates, BDC loan rates spike dramatically. The authors argue this premium isn’t just credit risk; banks report lower loss‑given‑default estimates for BDC loans, suggesting bargaining power and limited competition in the upstream funding market drive higher costs. The top three banks supply about half the bank funding to BDCs, and most BDCs rarely switch bankers, reinforcing concentration. This dynamic means monetary policy transmission through bank funding influences private credit broadly.

Meanwhile, bond markets also price BDCs sharply—spreads on ICE Bof A triple‑B corporate bonds exceed those of SpaceX and Oracle. JPMorgan’s Kabir Caprihan shows bond spreads widened for BDCs at the same time bank funding costs rose, hinting at possible contagion of lender concern. The cause may be heightened default correlation worries in a high‑rate, geopolitically uncertain, AI‑disrupted environment, or banks leveraging monopsony power to squeeze BDCs, spilling over to bond markets and hurting equity holders.

The findings raise questions about the sustainability of the BDC model, which hinges on expertise in debt financing. If BDCs pay over the odds due to limited banker competition, their cost structure could erode profitability.