Wall Street Sounds Alarm on Private Credit Bubble, Putting High-Yield BDCs in the Spotlight

The private credit market, once a niche alternative to traditional banking, has ballooned into a $3 trillion behemoth and is projected to near $5 trillion by the decade's end. This explosive growth, however, is now drawing intense scrutiny from some of finance's most prominent voices, raising questions about the sustainability of the eye-popping yields offered by many Business Development Companies (BDCs) that operate within this space.

In late 2025, DoubleLine Capital CEO Jeffrey Gundlach, the renowned "Bond King," publicly decried segments of the private credit industry for making "garbage loans." His comments echoed concerns voiced a month earlier by Goldman Sachs CEO Jamie Dimon, who warned that direct lending standards had grown too lenient. "If we ever have a downturn," Dimon cautioned, "you're going to see quite a bit more credit issues."

These warnings have turned a spotlight on the BDCs that have fueled and profited from the private credit boom. While their double-digit dividend yields are alluring, a closer examination reveals a landscape of varying quality and mounting risk.

Take Prospect Capital (NASDAQ: PSEC), for instance. The BDC trades at a deep discount to its net asset value and boasts a forward yield nearing 20%. Yet, its NAV has been eroding, and its heavy reliance on issuing perpetual preferred stock to raise capital has increased its fixed-payment obligations, casting doubt on the long-term security of its common dividend.

Similarly, FS KKR Capital (NYSE: FSK) and its 20.3% yield face headwinds. At the end of Q3 2025, its non-accrual loans—where borrowers have missed payments—stood at 5% of its portfolio. Rating agency Fitch subsequently revised its outlook on the company to Negative, citing "persistently elevated non-accruals."

"This is a classic case of yield-chasing blindness," says Marcus Thorne, a portfolio manager at Horizon Wealth Advisors. "Investors are piling into these ultra-high yields without asking *why* they're so high. In credit, a yield that looks too good to be true almost always is. We're seeing the cracks form in real-time."

Not all analysts share this dire view. Morgan Stanley (NYSE: MS), in its December 2025 Private Credit Outlook, suggested that barring a major economic shock, declining interest expenses and rising corporate earnings should support the fundamentals of credit issuers.

This divergence of opinion underscores a critical point: not all BDCs are created equal. For investors still seeking exposure, selectivity is paramount. Many analysts point to Ares Capital (NASDAQ: ARCC) as a potential standout. With roughly 61% of its portfolio in first-lien senior secured loans—putting it first in line for repayment—and investments spread across 587 companies in 35 industries, its 9.5% yield is backed by a more robust structure. Its non-accrual rate of 1.8% remains below its long-term average and industry peers.

"The narrative of an impending 'collapse' is overly broad and sensational," argues Dr. Anya Sharma, a finance professor at Crestview University. "Yes, underwriting standards have slipped in some corners, and a recession will test the market. But the asset class itself isn't doomed. This is a moment for disciplined due diligence, not panic. Ares demonstrates that quality underwriting and portfolio management can still deliver reliable income."

"It's pure greed fueling this, on both sides," counters Leo Brandt, a retired banker and vocal market commentator. "Lenders are chasing fees by pushing debt onto companies that can't handle it, and retail investors are being seduced by yields that are nothing but a mirage. When this house of cards tumbles, it won't be a 'correction'—it'll be a reckoning for everyone who ignored the basics of risk."

The path forward for investors is one of cautious navigation. The Wall Street warnings serve as a crucial reminder that in the hunt for income, portfolio quality and sustainable business models must trump headline yield figures. While the private credit market faces its first major stress test, opportunities may persist for those willing to look under the hood.