BDC COMMON STOCKS

Week 2

Second Thoughts

The enthusiasm that greeted the advent of the new administration is becoming more and more of a faded memory.

Instead, stock market participants are turning increasingly dour.

As our readers undoubtedly already know, the shortened trading week saw a strong employment report and evidence of stubborn inflation in the services sector.

Where the pundits saw 4 rate cuts in 2025 – enough to bring the Fed Funds rate and SOFR down close to 3% – 2 is now is the favorite number.

2 cuts is also the Fed’s own consensus amongst its members.

Our Spin

At the same time, the Fed staffers are saying inflation in 2025 might be the same as in 2024 because – you know – tariffs.

We’d say that an unchanged inflation rate is more likely to mean no rate cuts in 2025 out an abundance of caution.

Unrelenting inflation is most likely to be met by the Fed remaining unflinching on rates, so we can readily see the prospect of SOFR being exactly the same at year end 2025 as today – at 4.3%.

Nobody Cares

No reduction in rates – or even an increase – in 2025 may be bad news for the broad markets but for the BDC sector it’s largely music to the ears of market participants and should be for investors.

However, that’s not obvious this week, as the sector dropped (2.0%), going by the price change of the exchange traded fund with the ticker BIZD.

The S&P BDC Index, calculated on a total return basis and using a different methodology, is down (2.6%).

Not surprisingly when we look over at the 45 individual BDCs we track, 43 are down in price and only 2 up.

Amongst the 43 BDCs in the red, 15 are down (3.0%) or more in price. Here is a list:

Impact

This week’s poor results has weighed on other metrics that we use to measure the sector’s price performance.

2 BDCs reached new 52 week lows: Palmer Square BDC (PSBD) and OakTree Specialty Lending (OCSL).

The number of BDCs trading at or above net book value per share has dropped from 16 last week to 13 this week.

This the lowest number in the last 4 weeks.

Also, the number of BDCs trading 0% – 5% from their 52 week high amount to 9, with another 12 in the 5% to 10% zone.

A worrying 13 BDCs are trading within (5%) of their lows and 13 in the (5%-10%) range.

Going Forward

Of course, we don’t know if the market will rebound.

This was a strange week, what with the fires in California, President Carter’s funeral and the big employment numbers.

Maybe as investors recognize that BDC earnings are increasingly likely not to eroded much – if at all – in 2025. we may see a price rebound.

However, that may already be reflected in the BDC price surge that began just after the election.

Even after this “soft” week, the S&P BDC Index on a price basis is still up 3.0% from its level as presidential ballots were being counted and the outlook was unknown.

The index is also (3.2%) below its November 29, 2024 high, when investor enthusiasm was at its post-election peak.

From June 2024, when the BDC sector reached its Golden Age price peak, we are down (5.0%).

More Low To Go?

Will we get to a (10%) downward price adjustment – ie. a formal “correction”?

That’s not impossible with the analyst community projecting – according to the BDC Best Ideas aggregation of almost every BDC’s 2025 recurring earnings – a (9%) drop in profitability this year.

If so – and we’re just spit-balling here – that would suggest that the BDC sector on a total return basis might eke out a very modest gain in 2025 after two good years.

On the other hand, higher than expected SOFR might cause a re-think of analyst expectations, especially once all the IVQ 2024 results are in and as the new Trump Administration lays out its economic policies.

As we’ve said before, this is going to be a very unsettled year – something most investors hate but speculators prefer – and this means BDC earnings and distributions could head in any number of directions.