By Patturaja Murugaboopathy
June 12 (Reuters) - Dividends at U.S.-listed private-credit lenders rest on thinner cash cushions than headline earnings suggest, a Reuters analysis of regulatory filings showed, raising risks for investors drawn to the sector's high yields.
Median dividend coverage across 46 business development companies, or BDCs, slipped to 0.99 times in the first quarter of 2026, meaning reported net investment income no longer fully covered regular and supplemental payouts.
BDCs, which
lend mainly to middle-market companies, have attracted investors with double-digit yields and steady distributions. Those payouts are coming under pressure as falling interest rates and tighter lending spreads reduce income on floating-rate loans.
Excluding payment-in-kind interest, known as PIK, median coverage fell to 0.89 times.
PIK allows borrowers to defer interest payments by adding them to their loan balances, while BDCs record the interest as income before receiving cash, which can flatter dividend coverage and delay signs of borrower stress.
After adjusting for PIK, 33 BDCs had coverage below 1.0 times, compared with 25 BDCs on a reported basis.
Coverage below 1.0 does not automatically trigger a dividend cut, as BDCs can use accumulated income or fee waivers to support payouts temporarily. But sustained shortfalls leave boards with less room to defend dividends if earnings weaken further.
Slower revenue growth at some software borrowers has raised concerns about credit quality in parts of BDC portfolios. When borrowers face cash pressure, lenders may allow interest to be paid in kind rather than in cash.
Societe Generale said in a May report that widespread PIK use could mask rising leverage and postpone stress until borrowers refinance or repay their debt.
Several BDCs cut second-quarter payouts after reporting first-quarter results. Blue Owl Capital reduced its dividend to $0.31 a share from $0.37, Oaktree Specialty Lending lowered its payout to $0.30, and FS KKR cut its dividend to $0.48 from $0.70. Barings BDC kept its dividend unchanged but warned it could fall later in 2026.
PitchBook LCD said cash interest income among the 15 largest publicly traded BDCs fell 5% in the year to the first quarter. PIK income declined 4.8% but still accounted for 8.2% of total interest income.
(Reporting By Patturaja MurugaboopathyEditing by Vidya Ranganathan)
