Industry benchmark: 1-3% non-accruals at fair value is normal. 5%+ is a warning. 8%+ is a crisis -- expect dividend cut and NAV decline.
| Internal rating | Meaning | Action |
|---|---|---|
| 1 (best) | Performing better than expectations | None |
| 2 | Performing in line | Monitor |
| 3 | Performing but watching closely | Increased oversight |
| 4 | Underperforming, principal at risk | Workout team engaged |
| 5 (non-accrual) | Interest payment missed | Loss recognition begins |
Going Deeper — leverage-adjust the non-accrual ratio. Reported non-accruals are typically expressed as a percentage of portfolio fair value, but for stockholders the load-bearing number is non-accruals scaled to net assets, not to portfolio. A BDC running 1.5x debt-to-equity that reports 6% non-accruals at fair value is actually closer to 15% of net assets at risk — because the equity is the thinner cushion. Worked example: a $5B portfolio at 1.4x debt-to-equity carries roughly $2.9B of net assets; 8% non-accruals ($400M at fair value) is 14% of net assets. NAV degradation tracks the leverage-adjusted ratio, not the headline. AI prompt: "Compare this BDC's non-accrual rate as a percentage of portfolio fair value against non-accruals as a percentage of net assets across the past four quarters. Flag any quarter where the leverage-adjusted ratio moved by more than 100 basis points."
Sit with the ideas.
A BDC reports non-accruals at 6% of portfolio fair value, up from 2% one year ago. What is the right inference?