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Looks like business development companies trading publicly are heading into a squeeze next year. Word is, payment-in-kind arrangements are about to climb—think more debt serviced through equity or additional notes rather than cold hard cash. Why? Spreads keep getting tighter, margins narrower.
When lenders can't charge fat premiums anymore, borrowers start shifting toward PIK structures to ease immediate cash pressure. Classic cycle. For BDCs, that means portfolio stress could tick up—PIK accruals look fine on paper until they don't convert to actual liquidity.
Anyone tracking these firms should watch dividend coverage ratios closely. Tighter spreads plus rising PIK volume usually doesn't end with champagne toasts.