In Part 1, I counted PIK dollars on the income statement (that was fun). PIK interest at the 15 largest non-traded BDCs rose 6.4% in Q2 2026, to $292 million, and its share of interest income hit a series high once BCRED is stripped out.
But income statements tell you how much. They don’t tell you which loans, or why.
So for Part 2, I went into the loan books themselves (even more fun): every position in every schedule of investments, for five quarter-ends from June 2025 to June 2026.
Three things for y’all (there are more, but I’m told good writers only highlight three at a time):
Existing borrowers are switching to PIK far more often than new borrowers are arriving with it. For every borrower that came in with PIK, about 2.5 existing borrowers switched from paying cash to paying in kind.
The switches (cash —>PIK) are still marked near par. The median switched loan was marked at 99.6 cents. But they drift lower afterward.
The overall PIK book is growing, and its marks are slipping. Debt with a PIK component rose from $23.7 billion to $28.4 billion at cost, while fair value fell from 96.8% to 94.3% of cost.
Perhaps the most important finding is in the footnote to this article. I know, I know, it’s the fourth thing, but I’ve long ago given up any aspirations of becoming a good writer (I just want you to get in the habit of reading the dang footnotes).
Of course, the backdrop for non-traded BDCs is the outflow of capital. In Q2, redemptions at non-traded BDCs outran new money for the first time since at least 2022, according to PitchBook. You all are highly intelligent people and know that PIK income cannot fund a cash redemption. We’ll discuss the implications below.
Missed Part 1? Start here:
Switches > new PIK
Let’s start with new PIK’ers.
The number of borrowers paying some interest in kind rose from 396 to 492 across the 15 funds in the year to June 2026. Most of that growth came from existing loans previously paying cash.
Over four quarters, 200 existing borrowers moved from cash-pay to PIK. Only 81 new borrowers arrived with PIK built in. Another 16 came back from the dead 🧟 non-accrual as restructured loans that now pay in kind.
Going the other way, 126 borrowers went back to paying cash (yay for them), 57 left the portfolios (sold? repaid? refinanced?) and 18 moved to non-accrual (the opposite of yay, - for the lenders).
Let’s zoom out to the big picture:
about 11.5% of these funds’ loans, by cost, carried a PIK feature at June 30, 2026 (unchanged from a year earlier);
but only about 5.4% of the loans to new borrowers over that year came with PIK attached from the start.
Lincoln International reported that up to 25% of middle-market debt was originated with a PIK provision (or “PIK toggle”) at the end of last year, according to the WSJ. The figure fell to 13.5% in Q2.
If Lincoln’s figures are measured on a comparable basis, the gap suggests that many borrowers have PIK provisions but don’t use them until later in the loan’s life. That makes perfect sense, doesn’t it? A PIK option is valuable to a borrower: imagine if your mortgage let you skip part of your monthly payment and add it to the balance instead.
Can we tell toggles from modifications?
A toggle is a right the borrower negotiates on day one: it can choose to pay some of its interest “in kind,” adding it to the loan balance instead of paying it in cash.
A modification is a new deal, usually struck because the borrower can no longer meet the original terms.
The filings don’t make that easy. Personally, I would love to see the callout for which is which, but I don’t make the rules.
Here’s what Q2 2026 data tells us:
In that quarter, 51 loans across the 15-fund cohort started paying some interest in kind.
In 17 of the loans (~37% of the dollars), the terms were reworked, which looks like a modification.
Another 21 picked up a smaller step-up, usually 50 basis points, with the maturity unchanged. That’s what a PIK toggle typically costs the borrower, so these could be either.
Of the rest, 13 kept their terms unchanged.
Some other fun reading for your enjoyment:
Marked near par
Logically, a borrower that stops paying all its interest in cash may be facing tighter cash flow than when the loan was made, regardless of whether this was a toggle or a modification.
Whelp, you wouldn’t necessarily know it from the marks: