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
Should l Buy PSEC?
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.
Priority Income Fund Declares Monthly Cash Distributions
- Cash Distribution Announcement: Priority Income Fund has declared monthly cash distributions for March, April, and May 2026, with an annualized total cash distribution of $0.70000 per share, reflecting a 16.6% annualized rate based on the February 28, 2026 net asset value of $4.22.
- Distribution Details: The monthly cash distribution amounts to $0.05833 per share, totaling $0.17499 quarterly, with record dates on March 27, April 3, and May 5, 2026, and payment dates at the end of each month, ensuring timely returns for shareholders.
- Consecutive Distribution Record: This marks the 147th, 148th, and 149th consecutive monthly distributions since the Fund's inception in January 2014, with cumulative cash distributions totaling $17.163224 per share, demonstrating the Fund's stable cash flow and ongoing profitability.
- Tax Treatment Explanation: Distributions will first be treated as taxable investment company income undistributed from the prior year, then as current year taxable income, ensuring that this treatment does not affect tax reporting for shareholders, thereby maintaining transparency and compliance.
See More
Private Credit Fund Investors Concerned About a Specific Loan Payment Type
Private Credit Funds: A significant portion of income for large private credit funds is derived from borrowers who repay their interest using IOUs rather than cash.
Borrower Behavior: This trend indicates a reliance on non-cash repayment methods among certain borrowers, raising questions about the sustainability of such practices.
Financial Implications: The use of IOUs may impact the risk profile of private credit funds and their overall financial health.
Market Dynamics: This phenomenon could influence the broader lending landscape and the strategies employed by private credit investors.
See More
Prospect Capital Faces High-Yield Trap Amid Declining NAV
- Significant Stock Decline: Prospect Capital's stock price has plummeted by 66% over the past five years, and even with reinvested dividends, it has delivered a negative total return of 39%, indicating a substantial decline in its attractiveness as an income investment.
- Portfolio Risk: The company holds over 450 investments in its $6.5 billion portfolio, primarily focused on high-risk debt and equity in middle-market companies, which exposes it to greater macroeconomic pressures and investment losses.
- Declining Net Asset Value: From fiscal 2020 to fiscal 2025, Prospect Capital's net asset value (NAV) per share dropped from $8.18 to $6.56, further declining to $6.21 by the end of Q2 fiscal 2026, reflecting a significant deterioration in investment quality.
- Management Structure Issues: Prospect Capital continuously issues new shares at a discount, diluting existing investors' equity, while the management's fee structure is tied to total assets rather than shareholder returns, resulting in a lack of incentive to optimize long-term gains.
See More
Prospect Fund Declares First Quarterly Cash Bonus Distribution
- First Quarterly Distribution: Prospect Floating Rate and Alternative Income Fund has declared its first quarterly cash bonus distribution for March 2026, amounting to $0.5524 per share, indicating the fund's robust income generation capability.
- Record and Payment Dates: The record date for this distribution is set for March 27, 2026, with payment scheduled for April 3, 2026, ensuring timely returns for shareholders and bolstering investor confidence.
- Investment Strategy Overview: The fund primarily invests in floating rate loans of U.S. middle-market companies, showcasing its expertise in high-yield debt and equity investments, which is likely to attract more investor interest.
- Asset Management Scale: As of December 31, 2025, Prospect Capital Management L.P. manages a total of $7.2 billion in assets, reflecting its strong position and influence in the investment management industry.
See More
Morgan Stanley: Rising Default Risks in Private Credit
- Rising Default Expectations: Morgan Stanley forecasts that direct lending default rates will reach 8%, nearing pandemic peak levels, reflecting concerns over AI's impact on software service demand, which could lead to increased defaults and instability in the credit market.
- Investor Redemption Surge: Fears surrounding AI's potential disruption of software businesses have prompted investors to withdraw from private credit funds, resulting in a spike in redemptions by private market and alternative asset managers, further exacerbating market uncertainty.
- Increased Software Loan Risks: Morgan Stanley highlights that the credit fundamentals of software loans are challenged, with the highest leverage and lowest coverage ratios, particularly as 11% of software loans are set to mature by the end of 2027 and another 20% in 2028, raising default risks.
- Limited Market Impact: Despite rising default risks, Morgan Stanley believes these risks are not systemic, as corporate balance sheets remain largely healthy, and the leverage levels in private credit funds and BDCs are lower compared to historical crisis periods, indicating some market resilience.
See More
Private Credit Market Faces Growing Liquidity Crisis
- Surge in Redemption Requests: Recent redemption requests in private credit have surged to 14%, prompting Cliffwater to limit withdrawals from its flagship Cliffwater Corporate Lending Fund, indicating a strong demand for liquidity that could lead to a broader liquidity crisis.
- Active Secondary Market: Saba Capital, in collaboration with Cox Capital Partners, is launching tender offers to buy 6.9% of shares in Blue Owl Capital Corporation II at $3.80 per share in cash, highlighting the secondary market as a crucial avenue for investors seeking liquidity, although concerns remain about the market's capacity to handle large-scale redemptions.
- Necessity of Liquidity Restrictions: Chris Kotowski from Oppenheimer emphasizes that liquidity limitations in private credit funds are designed to achieve total return over time, and despite the market's lack of understanding of these structures, historically, these firms have shown resilience during downturns, indicating their strength.
- Rising Default Rate Risks: Industry experts warn that default rates in private credit could double in the coming years, with Morgan Stanley analysts suggesting defaults may reach 8%, reflecting growing concerns over loan quality, particularly as AI disrupts software companies.
See More
Priority Income Fund Declares Monthly Cash Distributions
- Cash Distribution Announcement: Priority Income Fund has declared monthly cash distributions for March, April, and May 2026, with an annualized total cash distribution of $0.70000 per share, reflecting a 16.6% annualized rate based on the February 28, 2026 net asset value of $4.22.
- Distribution Details: The monthly cash distribution amounts to $0.05833 per share, totaling $0.17499 quarterly, with record dates on March 27, April 3, and May 5, 2026, and payment dates at the end of each month, ensuring timely returns for shareholders.
- Consecutive Distribution Record: This marks the 147th, 148th, and 149th consecutive monthly distributions since the Fund's inception in January 2014, with cumulative cash distributions totaling $17.163224 per share, demonstrating the Fund's stable cash flow and ongoing profitability.
- Tax Treatment Explanation: Distributions will first be treated as taxable investment company income undistributed from the prior year, then as current year taxable income, ensuring that this treatment does not affect tax reporting for shareholders, thereby maintaining transparency and compliance.
See More
Private Credit Fund Investors Concerned About a Specific Loan Payment Type
Private Credit Funds: A significant portion of income for large private credit funds is derived from borrowers who repay their interest using IOUs rather than cash.
Borrower Behavior: This trend indicates a reliance on non-cash repayment methods among certain borrowers, raising questions about the sustainability of such practices.
Financial Implications: The use of IOUs may impact the risk profile of private credit funds and their overall financial health.
Market Dynamics: This phenomenon could influence the broader lending landscape and the strategies employed by private credit investors.
See More
Prospect Capital Faces High-Yield Trap Amid Declining NAV
- Significant Stock Decline: Prospect Capital's stock price has plummeted by 66% over the past five years, and even with reinvested dividends, it has delivered a negative total return of 39%, indicating a substantial decline in its attractiveness as an income investment.
- Portfolio Risk: The company holds over 450 investments in its $6.5 billion portfolio, primarily focused on high-risk debt and equity in middle-market companies, which exposes it to greater macroeconomic pressures and investment losses.
- Declining Net Asset Value: From fiscal 2020 to fiscal 2025, Prospect Capital's net asset value (NAV) per share dropped from $8.18 to $6.56, further declining to $6.21 by the end of Q2 fiscal 2026, reflecting a significant deterioration in investment quality.
- Management Structure Issues: Prospect Capital continuously issues new shares at a discount, diluting existing investors' equity, while the management's fee structure is tied to total assets rather than shareholder returns, resulting in a lack of incentive to optimize long-term gains.
See More
Prospect Fund Declares First Quarterly Cash Bonus Distribution
- First Quarterly Distribution: Prospect Floating Rate and Alternative Income Fund has declared its first quarterly cash bonus distribution for March 2026, amounting to $0.5524 per share, indicating the fund's robust income generation capability.
- Record and Payment Dates: The record date for this distribution is set for March 27, 2026, with payment scheduled for April 3, 2026, ensuring timely returns for shareholders and bolstering investor confidence.
- Investment Strategy Overview: The fund primarily invests in floating rate loans of U.S. middle-market companies, showcasing its expertise in high-yield debt and equity investments, which is likely to attract more investor interest.
- Asset Management Scale: As of December 31, 2025, Prospect Capital Management L.P. manages a total of $7.2 billion in assets, reflecting its strong position and influence in the investment management industry.
See More
Morgan Stanley: Rising Default Risks in Private Credit
- Rising Default Expectations: Morgan Stanley forecasts that direct lending default rates will reach 8%, nearing pandemic peak levels, reflecting concerns over AI's impact on software service demand, which could lead to increased defaults and instability in the credit market.
- Investor Redemption Surge: Fears surrounding AI's potential disruption of software businesses have prompted investors to withdraw from private credit funds, resulting in a spike in redemptions by private market and alternative asset managers, further exacerbating market uncertainty.
- Increased Software Loan Risks: Morgan Stanley highlights that the credit fundamentals of software loans are challenged, with the highest leverage and lowest coverage ratios, particularly as 11% of software loans are set to mature by the end of 2027 and another 20% in 2028, raising default risks.
- Limited Market Impact: Despite rising default risks, Morgan Stanley believes these risks are not systemic, as corporate balance sheets remain largely healthy, and the leverage levels in private credit funds and BDCs are lower compared to historical crisis periods, indicating some market resilience.
See More
Private Credit Market Faces Growing Liquidity Crisis
- Surge in Redemption Requests: Recent redemption requests in private credit have surged to 14%, prompting Cliffwater to limit withdrawals from its flagship Cliffwater Corporate Lending Fund, indicating a strong demand for liquidity that could lead to a broader liquidity crisis.
- Active Secondary Market: Saba Capital, in collaboration with Cox Capital Partners, is launching tender offers to buy 6.9% of shares in Blue Owl Capital Corporation II at $3.80 per share in cash, highlighting the secondary market as a crucial avenue for investors seeking liquidity, although concerns remain about the market's capacity to handle large-scale redemptions.
- Necessity of Liquidity Restrictions: Chris Kotowski from Oppenheimer emphasizes that liquidity limitations in private credit funds are designed to achieve total return over time, and despite the market's lack of understanding of these structures, historically, these firms have shown resilience during downturns, indicating their strength.
- Rising Default Rate Risks: Industry experts warn that default rates in private credit could double in the coming years, with Morgan Stanley analysts suggesting defaults may reach 8%, reflecting growing concerns over loan quality, particularly as AI disrupts software companies.
See More
