BDCs and Private Credit: Is the 10% Yield Too Good to Be True?

BDC yields around 10% can look suspiciously high if you are unfamiliar with the sector. Yield is not automatically a warning sign. It comes from the structure of Business Development Companies, the floating-rate loans they own, and the premium borrowers pay for flexible private lending.

The bigger question today is whether recent weakness in BDC share prices reflects genuine deterioration in the businesses—or simply negative sentiment around private credit.

Double-digit yields are common across the BDC sector because these vehicles are structured to distribute most of their income to shareholders.

Why BDC Yields Are So High

BDCs are pass-through vehicles designed to distribute most of their income to shareholders. Their portfolios are typically made up of loans to middle-market businesses, often secured by company assets and backed by private equity sponsors.

These loans generally earn a floating base rate such as SOFR, plus an additional spread and fees. Add moderate leverage at the BDC level, and double-digit portfolio yields become possible.

Borrowers are willing to pay more than they might in public debt markets because private lenders can offer speed, certainty, and customized terms.

Many BDC investments are first-lien senior secured loans, giving the lender priority over other creditors if a borrower runs into trouble.

Why Did BDC Prices Fall?

BDC stocks performed strongly in 2023 and 2024, then weakened through 2025 and early 2026. Several issues contributed.

Falling interest rates reduced the income earned on floating-rate loans. High-profile bankruptcies created broader fears around private credit. Concerns that AI could disrupt software companies hurt software-heavy BDC portfolios. And redemption restrictions at non-traded private-credit vehicles generated additional negative headlines.

The important distinction is that publicly traded BDCs such as KBDC, ARCC, and MAIN remain liquid. Investors can buy or sell shares whenever the stock market is open.

Redemption limits at non-traded BDCs have generated negative headlines, but they should not be confused with publicly traded BDCs that offer daily market liquidity.

Interest Rates Still Matter

Because BDC loans are largely floating rate, changes in SOFR directly influence investment income. Higher rates generally mean more income, but excessively high rates can also place additional pressure on borrowers and reduce new deal activity.

That creates a “Goldilocks” range: rates high enough to support attractive income, but not so high that they damage borrower finances or freeze mergers and acquisitions.

The sharp rise and subsequent decline in interest rates helps explain both the surge in BDC income and the more recent pressure on earnings expectations.

How Do You Judge BDC Quality?

Two commonly watched warning signs are non-accrual loans and Payment-in-Kind, or PIK, income. Neither number should be judged from a single quarter. Trends over several quarters matter more.

Karl suggested that NAV per share may be one of the most useful long-term measures because it captures changes in the underlying value of the loan portfolio, including restructurings and credit losses.

For income investors, management quality matters too: underwriting discipline, transparency, alignment with shareholders, insider ownership, and a history of maintaining NAV all help separate stronger BDCs from weaker ones.

KBDC’s Income

KBDC itself currently offers a high yield and has maintained regular distributions since becoming publicly traded.

KBDC has maintained its regular distributions since IPO while also paying supplemental income during stronger periods.

My Take

The recent BDC selloff does not mean every fund is a bargain, but it also does not mean private credit is collapsing.

The sector is diverse. Some portfolios may deserve their discounts, while others may have been dragged down by broad negative sentiment.

For me, the lesson is simple: look beyond the share price. Follow NAV, credit quality, non-accruals, PIK income, dividend coverage, and management history before deciding whether a 10% yield represents opportunity—or risk.

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