For a long time, the math has made sense for BDCs: by borrowing in the unsecured bond market and investing in floating-rate loans, they could fix their cost of capital and collect higher coupon payments from borrowers when base rates went up.

But a lot of the fixed-rate bonds that BDCs issued are coming due over the next few years. As they look to refinance, they will be subject to the same higher interest rates that have boosted their investment returns.

This presents a timing challenge, with potentially grave consequences if it is not navigated correctly. Refinance too soon, and higher borrowing costs could erode arbitrage; wait too long, and the cost of borrowing could go even higher.