BDC Non-Accrual Rates Hit 3.95% in Q2 2026 — and the Adjusted Figure Is 50% Higher

TL;DR: The ten largest publicly traded BDCs reported an aggregate non-accrual rate of 3.95% at amortized cost in Q2 2026, up 20 basis points quarter-over-quarter. The adjusted figure, which counts all debt of any borrower with even one impaired tranche, hit 5.95%, roughly 50% wider than the headline. The Fitch U.S. Private Credit Default Rate reached 6.1% on a trailing 12-month basis through July 2026, a record high. If you own BDC shares or are thinking about buying them, the number your fund manager highlights in the press release is almost certainly the smaller one.

Non-accrual loans are loans on which a BDC has stopped recognizing interest income because the borrower is not paying, or is unlikely to pay, in cash. They are the closest thing the BDC sector has to a public credit-quality signal, reported each quarter in 10-Q filings and earnings releases. According to Morningstar and PitchBook LCD analysis published around August 21, 2026, the top-10 BDC aggregate non-accrual balance reached $3.3 billion against an $83.6 billion total debt portfolio in Q2 2026. That is a real number, filed with the SEC, and you should be looking at it every quarter.

What the Q2 2026 Data Actually Shows

The fund-by-fund spread is wide. FS KKR Capital Corp (FSK) carried the heaviest reported non-accrual burden: 7.1% of its portfolio at amortized cost in Q2 2026, though that is down from 8.1% in Q1 2026. Ares Capital Corporation (ARCC), the largest BDC by assets, came in at 2.4% at cost, up from 1.8% as of December 31, 2025, per its 10-Q filed July 29, 2026 with the SEC. Blue Owl Capital Corp (OBDC) moved in the wrong direction, rising to 2.8% at cost from 2.0% in Q1 2026. Blackstone Secured Lending Fund (BXSL), which holds 96.8% of its $13.4 billion portfolio in first-lien senior secured debt, reported 1.8% non-accrual at fair value.

The table below uses the cost-basis figure where available because that is the standard comparator across filings. Fair-value figures deflate the headline because impaired loans are already marked down, so the percentage looks smaller even though the underlying credit problem is the same size.

BDC	Ticker	Non-Accrual at Cost (Q2 2026)	Prior Quarter / Period	QoQ Change
Ares Capital Corporation	ARCC	2.4%	1.8% (Dec 31, 2025)	+0.6 pp
FS KKR Capital Corp	FSK	7.1%	8.1% (Q1 2026)	-1.0 pp
Blue Owl Capital Corp	OBDC	2.8%	2.0% (Q1 2026)	+0.8 pp
Blackstone Secured Lending Fund	BXSL	1.8% (at fair value)	Not separately disclosed	N/A
Top-10 BDC Aggregate (reported)	Various	3.95%	3.75% (Q1 2026)	+0.20 pp
Top-10 BDC Aggregate (adjusted)	Various	5.95%	5.41% (Q1 2026)	+0.54 pp

The adjusted rate in that final row deserves its own paragraph. Morningstar and PitchBook LCD calculated it by treating the entire debt stack of any borrower, not just the one tranche formally on non-accrual, as impaired when that borrower has missed payments on any portion of its loans. The result: 101 borrowers affected, with adjusted non-accruals at 5.95% of top-10 BDC debt at cost, 54 basis points higher than the Q1 2026 figure. That is not a rounding error. That is a material difference in how you assess portfolio health.

Why the Headline Percentage Understates Real Distress

Two structural features of private credit accounting allow stress to accumulate before it shows up in the non-accrual line: payment-in-kind income and amend-and-extend restructurings.

Payment-in-kind, or PIK, income is interest that a borrower pays by adding to the principal balance of the loan rather than sending cash. From an accounting standpoint, the BDC books that interest as income and the loan stays current. The borrower's debt balance grows, the BDC's reported yield looks healthy, and the loan never touches the non-accrual bucket. Lincoln International data cited in the ABF Journal's April 2026 PIK analysis shows 11% of tracked private credit portfolios carried PIK interest as of Q1 2025. Of that, 6% was classified as distress-driven "bad PIK." These are loans amended after origination, with loan-to-value ratios that had risen from 49% to 86%. That is a borrower in serious trouble who does not yet appear in your BDC's non-accrual table.

Amend-and-extend (A&E) restructurings work similarly. When a borrower cannot refinance a maturing loan, the lender extends the maturity and often adds PIK provisions or modifies covenants. The loan technically stays performing. In a broadly syndicated loan market, this kind of restructuring would often trigger a credit event. In private credit, it happens bilaterally between lender and borrower, with no public announcement required. I find this the harder problem to track because there is no standardized disclosure. You have to read the entire portfolio schedule in a 10-Q, compare company names quarter to quarter, and notice when a position has quietly grown larger and shifted to a longer maturity.

The broader BDC universe tracked by Morningstar across $516 billion in assets at cost reported a non-accrual rate of 1.9% in Q1 2026, up 52 basis points in a single quarter. The adjusted rate for that universe was 3.3%, up 116 basis points quarter-over-quarter. Two names alone, Medallia and Inovalon, account for $4.4 billion of the adjusted non-accrual figure. When two borrowers represent that much stress concentration, diversification is doing less work than the portfolio count suggests.

What This Means for Your Cash Yield

Here is the number I find most useful for translating non-accrual data into portfolio impact. Morningstar calculated that BDCs currently have $772 million of interest income at risk. That breaks down to $522 million from direct non-accruals and $249 million from the adjusted borrower-level view. Against the $38 billion in total BDC cash interest income tracked, that amounts to 204 basis points of yield at risk. If all those borrowers stop paying cash today, the sector's cash yield drops from roughly 8.3% to 8.1%. That sounds small until you remember that BDC investors buy these funds specifically for the income, and that 8.1% assumes no additional deterioration.

Fitch Ratings put the U.S. Private Credit Default Rate at 6.1% on a trailing 12-month basis through July 2026, a record high since April. Fitch also reported that the median non-accrual rate across the 20 largest BDCs was 2.8% in Q2 2026, up 0.8 percentage points quarter-over-quarter. That is the broadest peer comparison available, and it is moving in one direction.

What to Check Before You Buy or Hold a BDC

I am not telling you to sell every BDC position. ARCC at 2.4% non-accrual is not the same animal as FSK at 7.1%. BXSL's 96.8% first-lien weighting gives it a structural cushion that a junior-debt-heavy portfolio does not have. What I am telling you is that buying a BDC on dividend yield alone, without reading the quarterly filing, is a mistake that tends to hurt you slowly and then all at once.

Here is what to pull from every 10-Q or earnings supplement before you make a decision.

What to Check	Where to Find It	Red Flag Threshold
Non-accrual % at amortized cost	Portfolio schedule footnotes, 10-Q Note on Investments	Above 3% and rising QoQ
Gap between cost-basis and fair-value non-accrual %	Same footnote; compare both figures	Gap wider than 3 percentage points (implies deep markdowns)
PIK income as % of total investment income	Income statement, earnings supplement	Above 10% and growing
First-lien weighting	Portfolio composition table in earnings supplement	Below 70% first-lien is higher risk in a default cycle
Largest 10 borrower concentration	Top-10 holdings table in 10-Q or supplement	Top-10 above 25% of portfolio fair value
Net asset value (NAV) per share trend	Balance sheet or cover page of 10-Q	Declining NAV for two or more consecutive quarters
Debt-to-equity ratio	Balance sheet; BDCs are regulated at a 2:1 maximum under the 1940 Act	Above 1.5x leaves little buffer before regulatory limits
Dividend coverage (NII per share vs. declared dividend)	Earnings press release, per-share table	Net investment income below declared dividend for two or more quarters

On the FSK versus ARCC comparison: FSK's 7.1% non-accrual at cost looked alarming, but the fair-value figure was 3.8%, and FSK management pointed to active restructuring work reducing the headline from 8.1% in Q1 2026. OBDC's 2.8% at cost against a fair-value non-accrual of just 0.8% is the gap I find more instructive. A 2.0 percentage-point spread implies the market is marking those loans down substantially, meaning recovery in a default scenario would be far lower than the cost-basis number suggests. ARCC's 10-Q filed July 29, 2026 and the FSK Q2 2026 SEC filing are both publicly available and free to read.

The BDC sector is not collapsing. These funds lend to middle-market companies, generally those with $10 million to $150 million in EBITDA, that cannot access public bond markets. That customer base carries more credit risk than an investment-grade corporate bond issuer by definition. What you are seeing in Q2 2026 non-accrual data is that customer base feeling the pressure of 18 months of higher-for-longer rates, slowing M&A exit activity, and softer earnings across consumer-facing and technology-adjacent sectors. The stress is real. The question is whether you are being compensated for it at the price and yield you are buying at today.

I own ARCC personally and have for several years. I also read every quarterly filing. That is not a coincidence. The AIN guide to BDC non-accrual metrics walks through the mechanics in more detail if you want the full framework before you start pulling filings yourself.

Frequently Asked Questions

What is the difference between non-accrual at cost and non-accrual at fair value?

Non-accrual at amortized cost shows the original face value of loans the BDC has stopped booking income on. Non-accrual at fair value shows what those same loans are currently worth based on market pricing and credit assumptions. A loan at $10 million cost might be marked at $6 million fair value if the borrower is severely distressed. The fair-value percentage looks smaller, which is why managers often lead with it in press releases. The cost-basis figure tells you the scale of the problem. The fair-value figure tells you how much loss is already priced in.

Does a rising non-accrual rate mean the BDC will cut its dividend?

Not automatically. BDCs pay dividends from net investment income (NII), which is interest and fee income after expenses. If non-accrual loans are a small enough share of the portfolio, NII can stay well above the dividend even as the non-accrual rate rises. The risk point is when non-accruals are large enough to reduce cash interest collections below the dividend level, or when a large realized loss forces a NAV write-down that pressures the fund's borrowing capacity. Watch the NII-per-share line relative to the declared dividend every quarter, and watch NAV per share for consecutive declines.

What is an amend-and-extend restructuring and why does it matter?

An amend-and-extend is a private negotiation between a BDC and a struggling borrower in which the loan's maturity date is pushed out, often with modified interest terms such as added PIK provisions or reduced cash pay rates. Because the loan does not formally default or go to non-accrual, it stays in the "performing" bucket in the BDC's portfolio table. This is legal and common, but it can mask the real number of companies in a portfolio that cannot service their debt on the original terms. You can sometimes detect A&E activity by tracking individual company names across quarterly portfolio schedules and noting shifts in maturity dates or interest rate structure.

Are all PIK loans a sign of trouble?

No. Some borrowers elect PIK provisions at origination as a cash-management tool, particularly growth-stage companies that prefer to reinvest cash rather than pay interest out of operating funds. The concern is what Lincoln International's data calls "bad PIK," meaning PIK provisions added after origination as part of a restructuring when the borrower cannot pay cash interest. That category represented 6% of tracked private credit portfolios as of Q1 2025, up from 2% at end-2021. When you see PIK income rising as a share of a BDC's total investment income, ask the investor relations team or read the supplement to determine whether those PIK positions were structured that way from day one or converted later.

Author Disclosure: Jeff Barnes, MBA has no personal position in any company, fund, or platform named in this article. Angel Investors Network has no current commercial relationship with any party mentioned. AIN provides marketing and education services, not investment advice. Past performance does not guarantee future results. All investments involve risk, including loss of principal.