Key facts
- Median dividend coverage for U.S.-listed BDCs fell to 0.99 times in Q1 2026, meaning income no longer fully covered payouts.
- Excluding payment-in-kind (PIK) interest, which allows borrowers to defer cash payments, median coverage fell to 0.89 times.
- After adjusting for PIK, 33 BDCs had coverage below 1.0 times, indicating a weaker cash position.
- Falling interest rates and tighter lending spreads are reducing income for BDCs, which lend to middle-market companies.
- Several BDCs, including Blue Owl Capital and Oaktree Specialty Lending, have recently cut their dividends.
Dividends paid by U.S.-listed private-credit lenders, known as business development companies (BDCs), are becoming less secure as their cash coverage thins, according to a Reuters analysis. The median dividend coverage across 46 BDCs fell to 0.99 times in the first quarter of 2026, meaning their reported net investment income no longer fully covered regular and supplemental payouts. This decline puts investors, who are attracted to the sector's high yields, at increased risk.
The pressure on payouts stems from falling interest rates and tighter lending spreads, which reduce income generated from floating-rate loans. When excluding payment-in-kind (PIK) interest—where borrowers can defer cash payments by adding them to loan balances—the median coverage dropped further to 0.89 times. After this adjustment, 33 BDCs had coverage below 1.0 times, compared to 25 on a reported basis.
While coverage below 1.0 does not automatically trigger a dividend cut, as BDCs can use accumulated income or fee waivers to temporarily support payouts, sustained shortfalls leave boards with less flexibility to defend dividends if earnings weaken further. Concerns about credit quality are also rising, particularly in parts of BDC portfolios with software borrowers experiencing slower revenue growth. Societe Generale noted that widespread PIK use can mask rising leverage and postpone stress until borrowers refinance or repay debt.
Several BDCs have already responded by cutting second-quarter payouts. Blue Owl Capital reduced its dividend from $0.37 to $0.31 per share, Oaktree Specialty Lending lowered its payout to $0.30, and FS KKR cut its dividend from $0.70 to $0.48. Barings BDC maintained its dividend but cautioned it might decrease later in 2026. Data from PitchBook LCD indicated that cash interest income among the 15 largest publicly traded BDCs fell 5% in the year leading up to the first quarter, though PIK income still accounted for 8.2% of total interest income.