"for hundreds of thousands of small and mid-sized businesses in the US. The BDC model, comparably to REITs, are required to pay 90% of profits to shareholders in return for access to the capital markets. Since the cash flow of BDCs is based on monthly interest payments on debt, shareholders have had the benefit of a commensurate high APY of anywhere from 7.5% to as high as 16%."
"The recent collapse of high-profile auto parts supplier First Brands over accusations of financial fraud was a shot across the bow for the BDC industry. Although $10 billion in debt is significantly larger than the average small to mid-sized corporation, 2026 has some special circumstances that make the prospective financial climate for BDCs a turbulent one, especially for those BDCs that have not prefunded their 2026 debt maturities."
The BDC model expanded after 2008 to supply capital and debt financing for hundreds of thousands of US small and mid-sized businesses. BDCs must distribute 90% of profits to shareholders, generating APYs commonly between 7.5% and 16% from monthly interest on loans. BDCs have taken roughly a 23% drawdown and face elevated default risk in 2026. The collapse of First Brands amid alleged financial fraud revealed concentration and credit risks, with $10 billion of corporate debt amplifying losses. Tariff revenues cut the deficit by $143 billion in fiscal Q1 2026 and $41 billion in fiscal 2025. A Fed rate cut tied to Kevin Warsh’s nomination would lower floating-rate BDC income and increase pressure on BDCs that have not prefunded 2026 debt maturities.
#business-development-companies-bdcs #interest-rate-risk #corporate-creditdefault-risk #dividend-and-nav-risk
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