Blue Vault
Two trends in private credit are moving in opposite directions.
Federal Reserve Bank of Boston researchers analyzed SEC filings from 168 BDCs, covering nearly 890,000 company-quarter loan observations. They found that the share of BDC loans using payment-in-kind (PIK) interest increased from approximately 6% in early 2022 to roughly 10% by early 2026.
PIK allows borrowers to add interest to loan principal rather than pay it in cash. It isn’t inherently a sign of distress, but the researchers note that increasing PIK usage across a lender’s portfolio can indicate pressure on borrower cash flows.
At the same time, BDC lending spreads have compressed by approximately one percentage point over the past two years.
Why It Matters
Put those trends together: more borrowers are deferring cash interest while lenders are receiving less incremental spread for making the loans.
The Boston Fed researchers describe that combination as a puzzle. They point to several possible explanations, including competitive pressure among private lenders and the possibility that lower borrowing costs are being used to reduce default risk.
For advisors, the takeaway isn’t that PIK is automatically problematic. It’s that portfolio yield alone may not tell you enough about the credit underneath it. PIK exposure, interest coverage, non-accruals and other credit-quality measures can add important context.
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Source: Federal Reserve Bank of Boston, “Early Warning Signals in Private Credit? What BDC Portfolios Reveal about Emerging Risks,” August 5, 2026. The views and findings summarized above are those of the cited researchers. Blue Vault’s proprietary BDC data is maintained separately from third-party and public-source information.
