Interest from PIK loans at BDCs dips amid concerns over credit quality, AI disruption

In this first part of a two-part series, LCD examines PIK interest income among the top 15 exchange-traded BDCs. A subsequent story will include a comparative analysis of interest rates, sector concentrations, and loan sizes. PIK interest income fell 10% in the first quarter among the top 15 exchange-traded BDCs, as managers worked to right-size portfolios amid growing concerns over credit quality and AI-disruption risk in private credit. Rising investor redemptions added further pressure, pushing BDCs to prioritize liquidity. Based on March 31 filings, PIK income for the cohort declined to $229 million in Q1, a two-year low. It was the steepest quarter-over-quarter drop in the data dating back to 2021. As a share of total interest income, PIK interest income slipped to 8.2%, its lowest level since Q4 2023. PIK interest income fell to $229 million in Q1. The 10% decline was the biggest quarter-over-quarter drop in the data dating back to 2021 when PIK interest meaningfully surpassed $100 million. PIK interest income in the twelve months through Q1 2026 was $979 million, down 4.8% from the LTM Q1 2025 figure of $1.028 billion. Five of the 15 BDCs reported double-digit declines in LTM PIK interest income, while nine of them reported an increase. The proportion of PIK interest to total interest declined from 8.6% to 8.2% from Q4 2025 to Q1 2026. Quarterly PIK interest declines 10% Among the 15 largest publicly traded BDCs, quarterly PIK interest fell by $25 million, or 10%, to $229 million in Q1, the lowest level since Q1 2024. The drop was primarily driven by reductions of $17 million by FS KKR (FSK) and $9 million by Blackstone Secured Lending Fund (BXSL), which were partially offset by a $6 million increase by Golub Capital BDC (GBDC). Overall, 11 of 15 top BDCs reported decreases in quarterly PIK interest in Q1. Prospect Capital (PSEC) and Bain Capital Specialty Finance (BCSF) had slight increases in PIK interest, and Morgan Stanley Direct Lending (MSDL) posted a marginal gain. As for cash interest income, the drop was a milder 5% in Q1, to $2.57 billion, as all 15 BDCs except for Capital Southwest Corp. (CSWC) reported declines. The Q1 quarterly cash income was the lowest since Q1 2024 when it was $2.48 billion. PIK interest income LTM run rate below $1 billion The latest reading reflects a continued downward trend. PIK interest was $997 million in 2025 and $1.011 billion in 2024. Annualizing the $229 million Q1 PIK interest amount, we estimate a run rate of $916 million. LTM PIK interest to total interest declined slightly to 8.4% through Q1, from 8.5% in 2025. Assuming that the Federal Reserve does not lower rates this year and that reference rates remain at or above current levels, this ratio will likely remain at the first-quarter’s 8.2% level or lower. LTM cash interest income was steady at $10.7 billion despite a drop in Q1 to $2.57 billion, which, when annualized, reflects a $10.3 billion run rate. LTM PIK interest trends up across top BDCs Despite a downward quarterly trend in PIK interest, nine of the 15 BDCs reported an increase in PIK interest income from LTM Q1 2025 to LTM Q1 2026. The three BDCs with the biggest percentage growth in PIK interest were MFIC, MSDL and BCSF. The three with the biggest declines were PSEC, GSBD and OCSL. ARCC and FSK had the highest LTM Q1 2026 PIK interest income in the group, at $221 million for ARCC and $200 million for FSK. Together, they aggregate to 43% of the cohort. From a net LTM change perspective, MFIC, MSDL and BCSF saw the greatest gains in PIK interest over the past twelve months (as of 3/31/26), while PSEC, GSBD and OCSL shed 42%, 37% and 27% of their respective PIK interest. Proportion of PIK interest to total interest (%) Overall, the share of PIK interest to total interest fell to 8.2%, from 8.6%, quarter over quarter, as 8 of the 15 BDCs reported a decline. Five BDCs reduced their respective proportion by double digits, ranging from 20% to 27%, including FSK, BXSL, CSWC, MFIC and NMFC. Golub Capital saw its PIK interest proportion rise from 5.7% to 9.5% of total interest, with PIK interest of $17 million in the quarter and $55 million on an LTM basis. Prospect Capital also saw a meaningful 200 bps increase to 12.2% for the quarter, and Bain Capital (BCSF) increased from 12.7% of total interest to 15%. While FS KKR shed the most PIK interest income, it still retained the highest proportion of PIK to total interest at 17%. The top 3 BDCs with the lowest level of PIK to total interest, with less than 5% each, were MSDL, MFIC and OCIC. Another way of looking at PIK interest management is to group the BDCs by the degree of change in the ratio. GBDC saw a two-thirds increase in the ratio to 9.5% for Q1, compared to 5.7% at year-end. This put GBDC’s Q1 ratio on par with that of ARCC and above the 8.2% average. Overall, PIK interest trended down in Q1 as BDCs reassessed their appetite for PIK loans in light of market concerns about private credit, while investor redemptions required BDCs to focus on liquidity management. Amid risk-off sentiment, fueled by AI-disruption concerns and valuation pressures that could put PIK loans at a higher credit risk, cash flow from actual cash interest is often preferred. In our part 2, we will dive deeper into the characteristics of the top 15 BDCs PIK loan portfolios, including a comparative analysis on interest rates, sector concentrations and loan sizes. Weekly coverage of US and European loans, bonds, private credit, and more. Featured image by Qi Yang/Getty Images This article originally appeared on PitchBook News