BDC COMMON STOCKS

Week 8

Goodbye

The major indices and the BDC market have parted ways.

As shown above, all the top indexes dropped significantly over the week: slipping, slumping and shedding.

By contrast, the BDC sector- as measured by the price change of its only exchange traded fund with the ticker BIZD – moved up 0.5%.

The S&P has a BDC Index as well, which increased 0.4% in price terms, using a different methodology.

8 weeks into the year, the S&P 500 has scratched out a 2.2% gain but BIZD has soared up 6.3%.

Almost (Unanimous)

For a third week in a row, BIZD reached a new 52 week high, carried there by almost every BDC moving up in price.

Of the 46 public BDCs we track, 41 were in the black price-wise this week, same as last week.

6 were up 3.0% or more versus 11 the week before.

Highest

The most unusual stat is that 14 BDCs reached a new 52 week high this week.

We’ve assembled weekly data on that particular metric since 2021 and never recorded so many BDCs reaching a new price peak in a week.

Sweet And Sour

One BDC – Crescent Capital (CCAP) – managed to both reach a new 52 week high early in the week in advance of reporting its IVQ 2024 results and also figured as the BDC with the biggest percentage price drop for the week: down (4.6%).

This is what we wrote in the BDC Publications Daily News Feed right after the earnings were released which we call our First Look:

Re-Think

After a fuller review – which included the 10K and the transcript of the conference call – our sister publication – BDC Best Ideas – decreased some of the expectations we had for CCAP in 2025.

To be fair – and consistent with what we said in the First Look – the deterioration noted was only modest, resulting in a mild re-valuation.

We sum up CCAP’s problems in BDC Best Ideas in this way: “Credit & Spreads Worsening”.

On The Brighter Side

This week saw Barings BDC (BBDC) and Blue Owl Capital (OBDC) also report their IVQ 2024 performance.

All seemed well with both, and BBDC surprised by maintaining its quarterly $0.26 quarterly dividend and promising 3 “specials” of $0.05 per share in 2025 – virtually ensuring this will be a record payout year for the BDC that has been under the Barings umbrella since 2018.

Not surprisingly, BBDC was one of the legion of BDCs reaching a new 52 week high.

Unconvinced

OBDC’s results – which had been previewed some time ago – met expectations but the stock price remains far away from its 52-week high regardless: (9%) off.

We wrote a feature article about some aspects of OBDC’s conference call for our Premium subscribers, but did not undertake a deep dive into the financials.

Why OBDC’s stock price lags many of its peers despite becoming the second largest public BDC a few weeks ago is not clear.

Some might speculate that some of the institutional holders of OBDE – its sister BDC just merged into OBDC – might be selling their stock now the merger has occurred.

We would point to the BDC’s involvement in the upper middle market (UMM) where the sector-wide trend of spread compression is most acute.

Anyway, we’re not shedding too many tears for OBDC and its shareholders.

The stock is trading at a premium to book and its 2025 price to earnings happens to be exactly at the BDC average for this multiple: 9.1x.

Lowest

At the moment, a very high number of BDCs – 21 – are trading within 5% of their 52 week highs and another 7 are between 5%-10% off.

By contrast, only 1 BDC is trading within (5%) of its 52 week low, which seems to deserve mention.

The BDC in question is one of the newest ones on the scene: Palmer Square BDC (PSBD).

As this lifetime price chart shows, PSBD’s stock price has been deflating for some time and is off (6%) since its IPO, according to Yahoo Finance:

Again, we can only speculate about why PSBD has been left out of the overall BDSC market euphoria.

Sticking with one of our favorite themes, we’d guess that the BDC’s strategy of investing in publicly traded loans of the largest borrowers may squeeze earnings due to extreme spread shrinkage.

“Private credit” is very “hot” right now, which might make raising capital easy but also means there is a lot of competition for loans from every direction.

PSBD – which has not yet reported its IVQ 2024 results – is trading at a (9%) discount to its Net Asset Value Per Share (NAVPS) and a 2025 PE of 8.4x.

According to Yahoo Finance, the analyst price targets for this unique BDC range between $16.50 and $17.00

Where We Stand

To state the obvious – with just 8 weeks of 2025 marked off the calendar, the public BDC sector is doing very well, thank-you very much.

BIZD is up 6.3%, and the S&P BDC Index on a total return basis is up 6.1%.

By contrast, the S&P 500 – which BDCs typically trail – is up 2.2% on a price basis and 2.4% when all dividends are figured in.

Comprehensive

Virtually every BDC investor long this market must feel like a stock picking genius as 44 of the 46 publicly traded BDCs are up in price.

(The only exceptions with a tiny amount of red ink involved are CCAP and Logan Ridge Finance (LRFC), which will shortly disappear into Portman Ridge (PTMN).

19 BDCs are trading at a premium to their NAVPS.

A Word Of Advice

BDC investors might want to take a deep breath and enjoy the moment because the sector is at a price level we rarely see and many BDCs are along for the ride, including some stocks that the market had previously seem to give up on.

Where We Go From Here

As recently as Friday, the broader markets suddenly noticed that economic uncertainty and the prospect of higher inflation might have a real-life implication down the road, causing stocks to fall back sharply.

Even BIZD – despite wearing its rally cap – fell (0.23%).

What happens next depends very much on whether there’s a real change of sentiment underway or whether Friday was a one-time thing.

We couldn’t help noticing that Treasury prices moved up slightly.

Questions

Could the entire investing universe, which has been anticipating a long period ahead of lower regulation; higher profits, etc., turn on its heels and head the other way?

Will a consensus begin to form – and we’ve seen early signs – that instead of a Golden Age ahead, we could be headed for some sort of recession?

We apologize for the question marks, but there is no way to know.

As a result, we could as easily see the BDC sector continue to rally and find new price heights as we could envisage a sharp price downturn.

Not So Fast

Unlike the Covid recession of 2020 we don’t believe a decline will happen very quickly – as it did in March 2020.

Investors in all markets will want to hang around as long as they can to see how the new world order being crafted out of Washington D.C. will play out.

However, if and when the writing seems to be on the wall for a downturn investors will do what they always have – new world order or not – and run for the exits.

Wrong Headed

As for the BDCs themselves any impact on them – and their portfolio companies – will take many more months to show up.

The analysts are constantly peppering BDC managers about what the impact of tariffs, etc. might be on their borrowers.

As you’d imagine, no BDC is confessing to any serious worry, but how could they at this stage?

In This Together

We believe that if there is economic trouble ahead it won’t be isolated in this company or that that either imports a lot or exports a lot or uses a large amount of immigrant labor.

The modern economy is built on inter-dependent businesses and a downturn will swamp all boats.

Anyway, that’s just our view.

Let’s see what happens next on the world stage because that’s likely to decide if 2025 continues to be a great year for investing in BDC common stocks.

In Shape

The BDCs themselves – as we’ve seen through the first third or so if earnings season – are motoring along as usual, neither being particularly cautious or reckless.

Leverage – broadly speaking – is on the low side compared to the regulatory limits.

Virtually every BDC has more than enough liquidity.

A great deal of undistributed taxable income remains on BDC books – as we’ve recently seen with BBDC – which will be headed into shareholder pockets shortly due to the tax rules.

Spreads are squeezed but any kind of economic disturbance might change that dynamic very quickly.

All in all, the public BDC sector – and its $250bn in portfolio assets – is well prepared for either expansion or contraction.

BDC investors, though, may not be. Especially for the latter.