PREAMBLE

We apologize for not writing a Market Recap last week-end but we were on the high seas crossing from the UK to the U.S. We’ve managed to string together 8 years of these summaries (for you history buffs, here’s a link to the oldest one we could find in our archive, dating back to 2016) but this was a boat too far. However, we’re back and looking forward to closing out the year.

BDC COMMON STOCKS

Week 51

Bad News Is Good News

In that knee-jerk way (aka algorithms) markets behave when “bad news” pops up, the BDC sector joined the major indices on their downward path after the Fed’s pronouncements on Wednesday.

BDCZ – the UBS Exchange Traded Note which owns most BDC stocks – fell (1.5%).

However, you don’t need to be a BDC expert or subscribe to the BDC Reporter to recognize that “higher for longer” where short-term rates are concerned is mostly a big positive for BDC profitability, and a potential factor for years to come.

Most investors have long ago stopped worrying that the Fed would ever return us to the days of zero interest rates, but the consensus has been that the Fed Funds rate could still drop to 2.5%, or something in that vicinity.

Multiplicity

Now the way forward is much more murky – even with that non-dramatic PCE report on Friday.

Will interest rates get cut 4 times in 2025, or 2 or 1 – or not at all?

What is the “neutral rate” and are we anywhere close?

Given that the “neutral rate is unobservable and can only be estimated”, we get the sense that the Fed – using their own analogy – will be trying to find their way in a darkened room for some time to come.

Never Say Never

It is entirely possible – though not the current consensus – that the latest (0.25%) rate cut – which has brought SOFR down to 4.30% – could be as low as we’re going to go.

That would leave interest rates anchored at the level reached at year end-2022, and roughly (20%) below their peak levels and 86x higher than in 2021.

Deep Breath

Anyway, BDC investors pulled themselves together after the initial panic selling, and BDCZ ended up “just” (1.0%) down for the week.

However, we get the impression there was much year-end pruning being done of individual BDC stocks for tax and tactical purposes. After all, this was week 51!

Overall, 36 of 42 BDCs were down in price. In that group, 16 were down by (3.0%) or more.

BDC investors are not famous for their loyalty.

Unpopular

8 BDCs reached new 52-week lows and you can imagine which BDCs received their ration of coal at year-end.

Every BDC involved has faced serious credit problems, either throughout the year or of late.

Here are the ticker symbols: CSWC, GSBD, HRZN, OCSL, OXSQ, PTMN, PSEC and WHF.

No one should be very much surprised that these BDCs are getting the thumbs down.

All but CSWC have rated as performing below expectations in our Quarterly Performance Table, which dates back from the IVQ 2023 to the IIIQ 2024.

Exceptional

CSWC is a special case, with credit problems popping up only in the most recent quarter.

We gave the BDC a rating of 3 out of 5 – but that was clearly a more generous view than the market.

CSWC is trading only slightly above its level of October 2023, and is down (11%) in 2024.

Still, on a “total return” basis – giving or taking a couple of cents – CSWC is flat for the year.

Back To Black

Overall – and with just one week to go in the year – we have to say that 2024 has not been kind to a surprisingly large number of BDCs in all segments of private credit.

(Maybe that should serve as a warning to all those asset managers anxious to either “get into” the Gold Rush that private credit has become, or enlarge their footprint).

Take it from someone who was a lender for many years, this is a tough business and only a few slips can make a big difference to performance and to your popularity with investors.

Moreover – as the Fed keeps telling us – economic growth has been strong all year; unemployment has been low; etc – and yet 23 BDCs out of 42 are down in price in 2024.

Of those, 15 have seen their prices fall (10%) or more, including 6 down by (25%) or more.

Piling On

While we’re mentioning depressing statistics, we can also note that only 12 BDCs are trading at or above net book value per share.

In the best of times, that number can be 20-21.

11 BDCs are trading within (5%) of their 52 week lows and another (11%) between (5%) and (10%).

Promises

At the end of next week, when there will only be one trading day left in 2024, we’ll close the year on a more positive note by discussing which BDCs shined.

No Lipstick Zone

But for the moment the data indicates that roughly half the BDC universe failed to gain favor with the market, which is hard to spin into a positive picture.

Maybe the most depressing part is that amongst the underperformers are BDCs managed by big name asset managers – and would be major players in that said private credit Gold Rush: Goldman Sachs; BlackRock; Oaktree and Prospect Capital.

As always – but maybe with more urgency than before – this makes the proper BDC stock selection very important.

At a time when investors in the broader markets are increasingly “buying the index” to save themselves all the work and heartbreak of stock picking that seems – to us at least – the wrong approach where public BDCs are concerned.

That’s all the more true because many of the troubles that bring some BDCs down – mostly in the form of credit missteps – show up relatively clearly in their published results.

For example – WhiteHorse Finance’s (WHF) Net Asset Value Per Share (NAVPS) – as per our table in Subscriber Tools – has been decreasing since the IIIQ 2021, Horizon Technology (HRZN) since the IIQ 2022; Goldman Sachs BDC (GSBD) has been declining by this metric all year. And so on.

As Kenny Rogers told us, it’s simple enough: you just have to know when to “hold ’em and when to fold ’em”. And then to actually do so.