Tariffs are increasing input costs for middle-market borrowers, compressing their margins and potentially impacting the credit quality of Business Development Companies (BDCs) like Ares Capital (ARCC) and Main Street Capital (MAIN). While both companies currently maintain stable dividends with solid coverage ratios (ARCC at 1.08x and MAIN at 1.47x), the real risk lies in borrower earnings under sustained tariff pressure. Key indicators to watch in upcoming earnings reports include non-accrual rates and payment-in-kind (PIK) income, which signal borrower stress before dividends are affected. The next two earnings cycles will reveal if tariff-induced margin compression translates into credit deterioration and dividend risk.
