For the past decade-and-a-half, the Business Development Company (BDC) business model has expanded drastically. Taking advantage of the private company debt financing black hole left by the 2008 subprime mortgage banking meltdown and subsequent mergers, BDCs stepped in to supply much needed capital and credit finance 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%.
Nevertheless, the BDC model is facing some unique default risks in 2026 and has taken a -23% drawdown over the past few months. This can be attributed to a number of factors, but shareholders of several well-known BDCs may wish to bear close scrutiny over the next several months for any significant downturns in NAV or dividend cuts with the following:
- Blue Owl Technology Finance (NYSE: OTF)
- BlackRock TCP Capital (NASDAQ: TCPC)
- Golub Capital BDC Inc. (NASDAQ: GBDC)
BDC Risks For 2026
BDCs fill a crucial financing niche for small and midsized corporations.
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. These include:
- Interest Rate Cut: the economic revival led by President Trump and Treasury Secretary Scott Bessent has cut the deficit significantly thanks to tariff revenues: $143 billion cut for fiscal Q1 2026, and $41 billion for fiscal 2025. Kevin Warsh’s nomination to replace Jerome Powell as Federal Reserve Chair will inevitably lead to a long overdue rate cut. As BDC loans are often floating rate contracts, BDC income will invariably also be reduced.
- Increase in PIK: A growing number of small and mid-sized corporations have been servicing their debt with payment-in-kind (PIK), which can take the form of rolling over additional debt, payment in goods and/or services, perks, etc. Since they aren’t in liquid funds, PIK does not easily translate to the bottom line, and can be interpreted as loan payment defaults.
- SaaSpocalypse: A widespread downturn of software companies and their stock started in 2025 due to the escalation and high-profile of AI. While a good many software functions can ostensibly be replaced by AI, the industry-wide fears exhibited by investors and subscribers threatens to bankrupt hundreds of software companies. This would leave their creditors – many of them BDCs – left holding the bag to only recoup pennies on the dollar.
- Maturity Wall: 23 out of 32 rated BDCs have unsecured debt maturing in 2026 totaling $12.7 billion (a 73% increase over 2025). This can potentially trigger refinance emergencies or other liquidity issues.
Blue Owl Technology Finance
Blue Owl Capital spun off its technology division into a separate company that has traded lower since debuting in June, 2025.
While OTF sports an 11.27% dividend yield, its focus on technology has been a steady NAV drop since it was spun off from Blue Owl Capital in June, 2025. Previously a private subsidiary, OTF has a very high number of SaaS company clients in its portfolio. Its primary software and technology risk exposure breaks down as follows:
- Systems Software (21%)
- Healthcare Technology (15%)
- Application Software (13%)
As SaaS company loan defaults are estimated to potentially run as high as 13% this year, OTF’s overweighting of debt in that sector puts it at a high risk. The fact that it did a $400 million bond offering a few months ago that sank its NAV further did not buoy its stock with the investing public, despite insider buying from the CEO and other executives.
BlackRock TCP Capital
Despite BlackRock’s size and reputation, its TCP BDC has faltered spectacularly.
A well-known name does not always guarantee performance. Although BlackRock is the largest asset manager on the face of the Earth, its BlackRock TCP Capital has been abysmal. Its NAV has plummeted around 50% in the past year, and while its current dividend yield is 21%, Wells Fargo’s and other investment banks’ analysts rate TCPC as a sell.
As series of sizable loan write-downs have been the main culprit behind TCPC’s drop, with defaults and/or liquidations of client debtors such as:
- Renovo Home Partners
- Razor
- InMobi
- SellerX
- Hylan
- Edmentum
Non-accrual loans rose to 4% of the portfolio, and credit quality will likely deteriorate further unless there are major changes to staunch the bleeding.
Golub Capital BDC Inc.
Despite Golub Capital’s excellent client relationships, its software exposure, high leverage, and lower interest climate has caused it to cut its dividend.
While Golub Capital’s $8.6 billion portfolio has a lower risk 92% first-lien collateralization on its corporate debt holdings, the entire BDC sector drawdown hurt its NAV, and it is feeling the crunch of reduced income from falling base interest rates. As 99% of its loans are variable-rate, the company recently announced a 15% dividend cut. Additionally, roughly 26% of Golub’s portfolio has exposure to the software sector, with an additional lesser exposure to healthcare technology. The risks of increasing non-accrual loans can impact Golub further throughout 2026.
As the company’s portfolio is nearly fully leveraged against its balance sheets, there is little wiggle room for Golub if any curveballs, such as further interest rate cuts, additional defaults, or any slowdowns in its M&A and loan activity were to occur. As such, analysts are hedging their forecasts with the possibility of Golub announcing an additional 10-20% further dividend reduction.
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