BDC PIK Interest and Nonaccrual Income: A Litigation Tracker

Why this matters

Business development companies (BDCs) are closed-end investment vehicles, regulated under the Investment Company Act of 1940, that lend to middle-market and often highly leveraged private companies. Most BDCs are externally managed: an outside adviser runs the portfolio and is paid a management fee plus an incentive fee calculated on the income the BDC reports. That fee structure is the pressure point at the center of a growing body of federal litigation.

Payment-in-kind (PIK) interest

PIK interest is interest a borrower pays not in cash but by adding to the loan's principal or issuing additional securities. A BDC can record PIK interest as income even though no cash has changed hands. Plaintiffs in these cases allege that heavy or rising PIK income can flatter a BDC's reported earnings while masking borrowers that cannot actually service their debt in cash.

Nonaccrual income

When collection on a loan becomes doubtful, a lender is expected to place the loan on nonaccrual status and stop recognizing interest income from it. The timing of that decision involves judgment. A recurring allegation is that a BDC delayed placing troubled loans on nonaccrual, keeping reported income and net asset value (NAV) elevated longer than the underlying credit justified.

NAV, fair value, and the incentive fee

BDC portfolios are largely illiquid, so many holdings are carried at fair value under discretionary Level 3 marks that the board and its valuation designee set under Rule 2a-5. Because the adviser's incentive fee is computed on reported income, decisions about PIK recognition, nonaccrual timing, and fair-value marks can feed directly into the fees the adviser collects. That alignment is what plaintiffs frame as a conflict of interest and, in derivative suits, a breach of fiduciary duty.

The claims

The matters collected here typically travel under one or more theories: breach of fiduciary duty and related derivative claims against directors and advisers; claims under Section 36(b) of the Investment Company Act for excessive advisory fees; and federal securities claims under Sections 10(b) and 14(a) of the Securities Exchange Act where investors allege that disclosures about income quality, NAV, or fee arithmetic were misleading. Nothing on this page is a finding of liability; each entry links to the underlying court filing.

What this page tracks

This is a running, updating index of federal filings touching BDC PIK income, nonaccrual timing, NAV, and incentive-fee practices. New matters are added as they are filed and as their dockets develop.