Fed Rate Hike Hits Private Credit Investors' Quarterly Payouts

The Federal Reserve has reversed its policy direction by raising interest rates for the first time in three years. This change affects private credit investors holding BDC income ETFs, such as VanEck's BIZD and Putnam's PBDC, who will see a decrease in their quarterly payouts.

These ETFs own equity in lenders, which generates their yield. The recent trend shows that the latest quarterly distributions for both funds are lower than the previous ones. For example, PBDC's latest distribution is $0.696, below its prior distribution of $0.71273, while BIZD's latest payment is $0.2391, down from $0.4818.

Another type of private credit investment, CLO ETFs, sits senior to the equity held by BDCs and pay less. Janus Henderson's JAAA CLO ETF targets high-rated tranches with a floating-rate coupon and minimal NAV whiplash, while Eldridge's CLOZ reaches into mezzanine tranches for more income.

The rate hike will have two effects on private companies: it will lift the interest bill they pay, which may lead to an increase in non-accruals and loan defaults. However, it will also increase the coupon lenders collect, resulting in a potential income tailwind.