Two High-Yield Investments (Reaching 20.9%) That May Be Deceptive (Plus a Reliable 9% Payer)
Written by Emily J. Thompson, Senior Investment Analyst
Updated: Dec 08 2025
0mins
Source: NASDAQ.COM
Bankruptcy Impact on BDCs: The bankruptcy of auto-parts supplier First Brands has raised concerns about business development companies (BDCs), which provide loans to small and mid-sized firms, leading to fears of more issues in the private-credit market.
Caution Against High-Yield BDCs: Investors are advised to be cautious of BDCs like Blue Owl Capital and Prospect Capital Corp, which have high fees and poor long-term performance, making them less attractive despite their high yields.
Alternative Investment Recommendation: The Liberty All-Star Growth Fund (ASG) is highlighted as a better investment option, offering a 9% dividend and a significant discount to NAV, outperforming BDCs in total return.
Upcoming Investment Opportunities: The author plans to release a "mini-portfolio for 2026" featuring four high-yield closed-end funds (CEFs) with an average yield of 9.2% and potential for over 20% price upside, encouraging readers to access this information.
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Analyst Views on PSEC
About PSEC
Prospect Capital Corporation is a business development company that focuses on lending to and investing in private businesses. Its investment objective is to generate both current income and long-term capital appreciation through debt and equity investments. It invests primarily in senior and subordinated secured debt and equity of private companies in need of capital for acquisitions, divestitures, growth, development, recapitalizations and other purposes. It invests primarily in first and second lien secured loans and unsecured debt, which in some cases includes an equity component. It invests in debt and equity positions of structured credit, which are a form of securitization in which the cash flows of a portfolio of loans are pooled and passed on to different classes of owners in various tranches. It may also acquire controlling interests in companies in conjunction with making secured debt investments in such companies. Its investment adviser is Prospect Capital Management L.P.
About the author
Emily J. Thompson
Emily J. Thompson, a Chartered Financial Analyst (CFA) with 12 years in investment research, graduated with honors from the Wharton School. Specializing in industrial and technology stocks, she provides in-depth analysis for Intellectia’s earnings and market brief reports.
High Dividend Risks and Rewards of Business Development Companies
- High Dividend Appeal: Business development companies like Ares Capital and Main Street Capital offer dividend yields exceeding 10%, attracting investor interest; however, this comes with high-risk lending models that depend on their ability to manage capital needs of mid-sized firms.
- Loan Rate Risks: Ares Capital's weighted average interest rate on its loan portfolio stands at 10.3%, mirroring Main Street Capital, indicating a high-risk lending environment for mid-sized companies, where elevated rates may lead to borrower defaults, impacting company earnings.
- Market Demand Fluctuations: During economic downturns, mid-sized firms may curtail borrowing, making it challenging for business development companies to expand their income-generating loan portfolios, which could affect their dividend payment capabilities and market attractiveness.
- Investor Confidence Impact: While demand for funding from business development companies remains, investor concerns about borrowers' repayment abilities may suppress investments, leading some firms like Gladstone Capital and Goldman Sachs BDC to lower their per-share dividends, reflecting the challenges of the current market environment.
See More
Analysis of Risks and Rewards in Business Development Company Investments
- High Dividend Yields: Business development companies like Ares Capital and Main Street Capital offer dividend yields exceeding 10%, which, while indicative of the high risks associated with their borrowers, attracts investors seeking substantial returns.
- Loan Rate Risks: Ares Capital's weighted average interest rate stands at 10.3%, matching that of Main Street Capital, indicating that the risk of borrower defaults may rise amid economic uncertainty, potentially impacting the stability of BDC earnings.
- Market Demand Fluctuations: In downturns, mid-sized companies may curtail borrowing, limiting BDCs' income sources; although they can convert interest payments into dividends, their ability to expand income-generating loans is constrained.
- Investor Confidence Impact: While demand for BDC funding remains healthy, investor concerns about borrowers' repayment capabilities may hinder BDCs' ability to raise capital, leading some companies like Gladstone Capital and Goldman Sachs BDC to lower their per-share payouts, reflecting challenges in the current market environment.
See More
Priority Income Fund Declares Distributions on Preferred Stocks
- Distribution Announcement: Priority Income Fund has declared distributions for its 7.00% Series D, 7.000% Series K, and 6.375% Series L preferred stocks, set to be paid on June 30, 2026, with per-share amounts of $0.43750 and $0.39844, indicating the company's ongoing cash flow and profitability.
- Tax Treatment Explanation: The distributions will first be treated as undistributed taxable investment company income from the prior year and then as current year taxable income, ensuring that this arrangement does not affect tax reporting for shareholders, thus maintaining tax transparency for investors.
- Portfolio Management Focus: The Fund primarily invests in senior secured loans and collateralized loan obligations, aiming to generate stable income through floating-rate loans, reflecting the company's expertise and market positioning in high-yield debt investments.
- Management Team Background: Managed by Priority Senior Secured Income Management, LLC, the team comes from Prospect Capital Management L.P., which has over 30 years of experience in managing high-yield investments, enhancing investor confidence in the fund's management capabilities.
See More
Priority Income Fund Declares Distributions on Preferred Stocks
- Distribution Announcement: Priority Income Fund has declared distributions for its 7.00% Series D, 7.00% Series K, and 6.375% Series L preferred stocks, with payments of $0.43750 and $0.39844 per share scheduled for June 30, 2026, reflecting the company's commitment to shareholder returns.
- Tax Treatment: The distributions will first be treated as undistributed taxable investment company income from the prior year and then as current year taxable income, ensuring transparency and compliance without affecting shareholders' tax reporting.
- Portfolio Management: The Fund primarily invests in senior secured loans and collateralized loan obligations (CLOs), which typically have floating interest rates and a first lien on borrower assets, indicating the company's expertise and positioning in the high-yield debt investment sector.
- Management Team Background: Managed by Priority Senior Secured Income Management, LLC, the team comes from Prospect Capital Management L.P., boasting over 30 years of investment experience, showcasing their deep expertise and professional capability in high-yield investments.
See More
Prospect Capital to Sell Valley Electric Company for $328 Million
- Transaction Value: Prospect Capital announced the sale of its portfolio company Valley Electric for expected gross proceeds of approximately $328 million, with the transaction anticipated to close around July 1, 2026, indicating a proactive asset disposal strategy.
- Net Proceeds Expectation: The company expects to achieve about $280 million in net exit proceeds from this investment, excluding potential adjustments and earn-out payments, demonstrating its success in investment management and commitment to shareholder returns.
- Return on Investment: Since 2012, Prospect Capital has realized a 20.4% annualized internal rate of return and a 4.8-times multiple on invested capital from this investment, reflecting its efficiency and profitability in capital operations.
- Future Outlook: This transaction not only provides substantial cash flow but also optimizes the company's investment portfolio, enhancing future investment flexibility and market competitiveness.
See More
Diverse Risk Premiums in U.S. Private Credit Market
- Risk Premium Disparity: A Reuters analysis reveals that U.S. private credit firms are facing diverse risk premiums, with smaller lenders like BCP Investment Corp showing a weighted average option-adjusted spread (OAS) of 680 basis points, indicating market concerns over credit quality.
- Increased Market Selectivity: As borrower stress rises, investors are increasingly evaluating Business Development Companies (BDCs) based on portfolio quality and capital access, resulting in larger firms like Ares Capital maintaining spreads between 150 and 200 basis points.
- Rising Default Rates: Fitch Ratings reports that the default rate among U.S. private credit borrowers reached 6% as of April, the highest since August 2024, reflecting a deteriorating market backdrop.
- Uncertain Outlook: Analysts predict that in the coming months, due to downgrades, increased rate volatility, and heightened focus on software-as-a-service (SaaS) exposures, the bond market for BDCs will experience greater differentiation, potentially impacting investor confidence.
See More
High Dividend Risks and Rewards of Business Development Companies
- High Dividend Appeal: Business development companies like Ares Capital and Main Street Capital offer dividend yields exceeding 10%, attracting investor interest; however, this comes with high-risk lending models that depend on their ability to manage capital needs of mid-sized firms.
- Loan Rate Risks: Ares Capital's weighted average interest rate on its loan portfolio stands at 10.3%, mirroring Main Street Capital, indicating a high-risk lending environment for mid-sized companies, where elevated rates may lead to borrower defaults, impacting company earnings.
- Market Demand Fluctuations: During economic downturns, mid-sized firms may curtail borrowing, making it challenging for business development companies to expand their income-generating loan portfolios, which could affect their dividend payment capabilities and market attractiveness.
- Investor Confidence Impact: While demand for funding from business development companies remains, investor concerns about borrowers' repayment abilities may suppress investments, leading some firms like Gladstone Capital and Goldman Sachs BDC to lower their per-share dividends, reflecting the challenges of the current market environment.
See More
Analysis of Risks and Rewards in Business Development Company Investments
- High Dividend Yields: Business development companies like Ares Capital and Main Street Capital offer dividend yields exceeding 10%, which, while indicative of the high risks associated with their borrowers, attracts investors seeking substantial returns.
- Loan Rate Risks: Ares Capital's weighted average interest rate stands at 10.3%, matching that of Main Street Capital, indicating that the risk of borrower defaults may rise amid economic uncertainty, potentially impacting the stability of BDC earnings.
- Market Demand Fluctuations: In downturns, mid-sized companies may curtail borrowing, limiting BDCs' income sources; although they can convert interest payments into dividends, their ability to expand income-generating loans is constrained.
- Investor Confidence Impact: While demand for BDC funding remains healthy, investor concerns about borrowers' repayment capabilities may hinder BDCs' ability to raise capital, leading some companies like Gladstone Capital and Goldman Sachs BDC to lower their per-share payouts, reflecting challenges in the current market environment.
See More
Priority Income Fund Declares Distributions on Preferred Stocks
- Distribution Announcement: Priority Income Fund has declared distributions for its 7.00% Series D, 7.000% Series K, and 6.375% Series L preferred stocks, set to be paid on June 30, 2026, with per-share amounts of $0.43750 and $0.39844, indicating the company's ongoing cash flow and profitability.
- Tax Treatment Explanation: The distributions will first be treated as undistributed taxable investment company income from the prior year and then as current year taxable income, ensuring that this arrangement does not affect tax reporting for shareholders, thus maintaining tax transparency for investors.
- Portfolio Management Focus: The Fund primarily invests in senior secured loans and collateralized loan obligations, aiming to generate stable income through floating-rate loans, reflecting the company's expertise and market positioning in high-yield debt investments.
- Management Team Background: Managed by Priority Senior Secured Income Management, LLC, the team comes from Prospect Capital Management L.P., which has over 30 years of experience in managing high-yield investments, enhancing investor confidence in the fund's management capabilities.
See More
Priority Income Fund Declares Distributions on Preferred Stocks
- Distribution Announcement: Priority Income Fund has declared distributions for its 7.00% Series D, 7.00% Series K, and 6.375% Series L preferred stocks, with payments of $0.43750 and $0.39844 per share scheduled for June 30, 2026, reflecting the company's commitment to shareholder returns.
- Tax Treatment: The distributions will first be treated as undistributed taxable investment company income from the prior year and then as current year taxable income, ensuring transparency and compliance without affecting shareholders' tax reporting.
- Portfolio Management: The Fund primarily invests in senior secured loans and collateralized loan obligations (CLOs), which typically have floating interest rates and a first lien on borrower assets, indicating the company's expertise and positioning in the high-yield debt investment sector.
- Management Team Background: Managed by Priority Senior Secured Income Management, LLC, the team comes from Prospect Capital Management L.P., boasting over 30 years of investment experience, showcasing their deep expertise and professional capability in high-yield investments.
See More
Prospect Capital to Sell Valley Electric Company for $328 Million
- Transaction Value: Prospect Capital announced the sale of its portfolio company Valley Electric for expected gross proceeds of approximately $328 million, with the transaction anticipated to close around July 1, 2026, indicating a proactive asset disposal strategy.
- Net Proceeds Expectation: The company expects to achieve about $280 million in net exit proceeds from this investment, excluding potential adjustments and earn-out payments, demonstrating its success in investment management and commitment to shareholder returns.
- Return on Investment: Since 2012, Prospect Capital has realized a 20.4% annualized internal rate of return and a 4.8-times multiple on invested capital from this investment, reflecting its efficiency and profitability in capital operations.
- Future Outlook: This transaction not only provides substantial cash flow but also optimizes the company's investment portfolio, enhancing future investment flexibility and market competitiveness.
See More
Diverse Risk Premiums in U.S. Private Credit Market
- Risk Premium Disparity: A Reuters analysis reveals that U.S. private credit firms are facing diverse risk premiums, with smaller lenders like BCP Investment Corp showing a weighted average option-adjusted spread (OAS) of 680 basis points, indicating market concerns over credit quality.
- Increased Market Selectivity: As borrower stress rises, investors are increasingly evaluating Business Development Companies (BDCs) based on portfolio quality and capital access, resulting in larger firms like Ares Capital maintaining spreads between 150 and 200 basis points.
- Rising Default Rates: Fitch Ratings reports that the default rate among U.S. private credit borrowers reached 6% as of April, the highest since August 2024, reflecting a deteriorating market backdrop.
- Uncertain Outlook: Analysts predict that in the coming months, due to downgrades, increased rate volatility, and heightened focus on software-as-a-service (SaaS) exposures, the bond market for BDCs will experience greater differentiation, potentially impacting investor confidence.
See More
