Could tremors in private credit be spilling over into the syndicated loan market?
BDCs are selling syndicated loans to raise liquidity as these retail-focused private credit vehicles face a backlog of redemptions from clients worried about pressures on these funds, including concerns about potential AI-driven disruption to their software investments. Buysiders said that could be weighing on trading in some tech credits in the BSL market like KnowBe4 this year.
With private credit loans inherently difficult to trade, market participants say it made sense for perpetual BDCs to run down their holdings of more liquid assets to manage cash and meet any outflows. The less palatable alternative was to dump their private credit investments in a hurry and potentially at steep discounts, they said.
“What’s your most liquid asset in your book? It’s much easier to get out of $100m-$200m of a [leveraged] loan position at a reasonable price than in it is do that in private credit,” said a loan PM.
A 9fin source said at a recent conference, several BDCs mentioned that they were shedding some of their syndicated loan investments.
“They were using [their BSL debt] as a source of liquidity to meet redemptions,” they said. “The presumption is they can get good pricing on BSLs. Which I guess they can, but every BDC is probably going to be selling BSLs now.”
To be sure, BDCs are unlikely to exit some of this BSL debt — particularly that issued by tech borrowers — at par. But even at a discount, syndicated loans can be traded actively in a way that private credit cannot.
An analysis of BDC holdings bears that out. JP Morgan analysts said estimated holdings of syndicated loans among perpetual BDCs that it tracked shrank to $25.5bn in Q1 2026, down 18% from the previous quarter amount of $31bn.
Alternative asset managers have mentioned the use of BSLs as a so-called liquidity sleeve. In its Q1 earnings call, HPS Corporate Lending Fund held $1.57bn of syndicated loans as of March that could be used to provide additional liquidity on top of their existing credit facilities.
Other BDC funds including one run by Guggenheim have said in filings that the general purpose of these BSL investments were to support their share repurchase programs and manage cash levels.
These liquidity sleeves come at a cost, however. In a March stakeholder letter, Sixth Street pointed out using these tools would “by definition, drive lower returns for non-traded vehicles.” That, in turn, would drive capital in search of other higher returning opportunities.
With BDCs still facing a queue of redemption requests, further selling pressure could persist. In Q1, aggregate redemption requests for nine large perpetual BDCs tracked by JPM totaled $13.4bn, of which $7.8bn was fulfilled. For context, BSL trading volume reached $288bn during Q1, according to the LSTA.
Many BDCs have limited redemption requests to 5% of the overall portfolio to ensure orderly outflows. In June, Ares, Morgan Stanley and Apollo were some of those who disclosed decisions to cap redemptions.
Others were more skeptical of that notion. Lotfi Karoui, credit strategist for Pimco, in a blog post stated that “even under stress, this exposure is too small to generate meaningful forced selling in the BSL market. To be clear, redemption pressure is real — and increasingly widespread across non‑traded BDCs — but the risk of a direct flow‑driven spillover into the BSL market remains modest.”
Though that could depend on your estimate of BSL holdings in the BDC market. Pimco calculated it as a less than 6% share, though other estimates from the Boston Federal Reserve came in at a much higher 13% to 15%.
But buysiders in the BSL market say in the right circumstances, such selling could have a pronounced impact in secondary trading. They say it could be a factor why some tech names in the BSL market have been struggling to recover, aside from general concerns around AI disruption.
Some of the biggest holders and sellers in certain software borrowers such as KnowBe4 and Qlik Technologies were private credit funds, according to sources and 9fin’s BDC database.
Though individual holdings might be small relative to the total cap stack, another loan PM said prices for leveraged loans could move on limited selling because they are illiquid relative to other forms of corporate debt like bonds but are nonetheless much easier to trade than private credit debt.
