The Vanishing: How BDCs Disappear Bad Loans

Case Study in Gaming Loan Reporting: Blackstone’s BCRED

In a recent interview defending private credit, Blackstone’s head of Private Wealth suggested separating the signal from the noise. I agree. In this post, I separate the signal from the noise. But maybe not in the way Blackstone hoped.

In analyzing the data from our BDC loan level intel tool I observed several cases highlighting how BDCs stage manage a troubled loan to minimize the impact on performance reporting and the BDC’s incentive fees. I previously published examples highlighting how several BDCs reported small non-accrual loans from a borrower while reporting larger loans from that same borrower as performing and valued at 100.

This case study takes these examples to the next level.

How to make a troubled loan disappear

In this post I highlight a loan from Blackstone’s BCRED, by far the largest BDC, using Prodege, one of their larger borrowers. This is but one of many examples. As shown in the timeline image, Prodege loans were clearly at risk when BCRED split the single large cash interest sub-performing loan into two large “performing” PIK interest loans valued at 100, plus a 3rd smaller, non-accrual loan. The non-accrual loan was “purchased” at 50 cents on the dollar and valued at same with no unrealized loss reported.

The two “performing” loans, comprising 70% of the balance, despite paying ZERO cash interest, enables Blackstone to maximize their reported yield as well as incentive income (since PIK interest is included in the income-based incentive fee calculations). Here we have a borrower with virtually no payment obligations, in clear distress, yet 70% of the loan is reported as performing and eligible for incentive fees.

Further, I would note that BCRED has a fairly trivial 5% hurdle rate before they earn income-based incentive fee income. This is a joke for a portfolio with gross yields close to 10% and 1x leverage.

Side Note to Policymakers

New BDC laws are needed. Among the provisions, new laws should prohibit incentive fees based on PIK income and require the reporting of all loans from a troubled borrower as non-accrual if any loan from that borrower is on non-accrual.

The timeline

In June, 2025 BCRED valued their sole loan to Prodege at 92. The value dropped to 82 in September. In December, the single-loan became 3, with the smallest loan on non-accrual, and the two larger loans converted to full PIK and valued at 100.

Specifically, in December the $560M loan was split into three pieces. The two PIK loans ($198M and $93M in principal) were repriced at par with zero unrealized losses. The non-accrual tranche was $268M principal priced at just 50 cents, or a cost and fair value of $134M fair value.

While they don’t break out realized losses at the loan level, based on the realized losses reported in Q4, it’s likely that the previous unrealized loss was crystalized as a realized loss. It’s difficult to confirm without having the loan level realized loss data. And optically, having 70% of the loan now reported as a par performing loan despite the default on the smaller loan and conversion to PIK materially masks the risk of the loan.

In reality, this entire loan should have been reported as non-performing and excluded from incentive income. However, the rules are clearly in BCRED’s (and all BDC’s) favor.

Distorted Incentives

This type of restructuring illustrates the distorted incentives BDCs have in managing troubled loans. Converting a loan to PIK avoids a default and maximizes reported yield and incentive fee income. Minimizing troubled loans creates the illusion of a stronger portfolio, improves incentive fee income and reduces unrealized losses.

This case clearly illustrates the ability of BDCs to manipulate troubled loans to optimize reporting and fee generation.

This is just one example. I guarantee there are many more such examples, which I will reveal in future posts using our BDC Intel Tools.

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