Corrected Month: February vs January

BDC COMMON STOCKS

Week 6

Off The Boil

As recently as Tuesday, the BDC sector – as measured by the stock price of BIZD – its only exchange traded fund – was at a new 52 week high of $17.53.

(The S&P BDC Index – on a price basis – peaked on January 31, 2025).

By this Friday, both indices – and the sector – had fallen back.

BIZD ended at $17.25 – (1.6%) off its record level and (1.4%) below the week before.

The S&P BDC Index dropped (1.1%) week over week and from its 52 week-high.

Pointing Fingers

Maybe the price softening was due to the relatively lackluster set of IVQ 2024 results received from Ares Capital (ARCC); Oaktree Specialty (OCSL); Golub Capital (GBDC); Capital Southwest (CSWC) and PhenixFin (PFX)?

(More on those results in a moment).

Or, maybe – and has been the case in the past – the slightly sour tone affecting all the major indices – see above – seeped into the BDC sector.

What happens to prices in the weeks ahead will likely tell the story.

Metrics

For the moment, we can report that the mood amongst the 46 BDCs we now track was mixed and muted.

“Mixed” in that 22 BDCs rose in price or were unchanged and 24 dropped.

“Muted” in that most price changes were modest, with only two BDCs up more than 3.0% in price and 4 down by more than (3.0%).

Ups And Down

Trinity Capital (TRIN) has caught an investor confidence wave of late and was up 6.3% this week, and is up 9.4% in the last month.

In both cases, TRIN is the best price performer in those time categories.

TRIN has not yet reported its IVQ 2024 results but did offer investors a preview on February 5th that seems to have confirmed the market’s already warming feeling.

Since November 4, 2024 – when TRIN had a mini-price slump, the stock is up 17%.

Also up in price this week – by 4.2% – was the shiny newest public BDC – MSC Investment (MSIF).

On Friday, MSIF closed at $16.89, after going public at $15.53 – a near 9% climb in a very short time.

Downers

ARCC was the Biggest Loser price-wise this week, off (3.9%) after reporting its IVQ 2024 results. However, that followed on the tail of the BDC reaching new all-time price highs.

At least one analyst was advising caution, suggesting the stock was more than fairly valued so “profit-taking” probably explains this reverse.

Triple Point Venture Growth (TPVG) – which has not yet reported its results – was down (3.9%) but that seems part of the pre-earnings jitters which affects many BDCs. In the last month TPVG is still up 3.9%.

Unforgiven

OCSL – which did report its IVQ 2024 results – is off (3.25%).

That’s really not too bad given that the BDC had to concede that its credit troubles persist and its Net Asset Value Per Share (NAVPS) fell (2.5%) – the most of any BDC that has reported so far – and its dividend payout dropped.

Maybe investors were encouraged by the actions taken by the external manager to permanently reduce compensation costs and clarify how dividends will be paid.

Most impressive of all – in our humble opinion – is that Oaktree itself invested a large amount of its own capital in OCSL stock at a premium to par in January.

This gave the BDC more money to play with, boosted NAVPS a little and demonstrated – as it was supposed to – the manager’s long-term commitment to its ailing public BDC.

Nonetheless, investors are going to have to see real progress made on the credit front before OCSL’s stock price can turn around and that might be some time away.

Over at our sister publication – the BDC Credit Reporter – we’ll be reviewing the entire portfolio once again when time allows to see what the chances are that OCSL can “turn the corner”.When we last looked a quarter ago, we were not impressed with what we found and were not surprised by the still weak IVQ 2024 performance.

BDC CREDIT REPORTER

No Big Deal

Finally, Gladstone Capital (GLAD) was down (3.0%).

This does not mean much given that the BDC’s stock price has been very buoyant of late.

Once again, this seems like a case of market positioning in advance of earnings.

Other Metrics

Despite a slower week sector-wise, 3 BDCs reached new price heights – ARCC, TRIN and SLR Investment (SLRC).

There were no 52 week lows.

A still high BDCs are trading at or above their NAVPS, down from 19 the week before.

Where We Are

After six weeks of 2025, the BDC sector is in good shape price-wise, the decline of the last few days notwithstanding.

BIZD is up 3.7% and the S&P BDC Index is up 3.4% on a “total return” basis.

41 BDCs are unchanged or up in price in the new year and only 5 in the red, a sure sign of market enthusiasm.

However, there are only 3 BDCs up by a double digit percentage: the afore mentioned MSIF; Oxford Square (OXSQ) for reasons that we cannot explain and TRIN – riding that wave.

On the downside, the BDCs in the red include Prospect Capital (PSEC) – unable to break out of its funk despite promises of strategy reform; and Blue Owl (OBDC), despite completing its recent merger.

Looking Forward

God only knows what will happen in the mainstream markets in the weeks and months ahead.

The Trump Administration has brought a degree of uncertainty about how the U.S. and global financial system will work that we’ve never experienced before.

Tariffs are on, tariffs are off (both a while); mass deportations might or might not roil through agricultural works; construction sites and schools; financial regulators such as the Fed may or may not be placed under Washington D.C.’s control and so on.

Already this has caused analysts to ask questions to BDC managers about the impact on their portfolio companies.

Naturally enough, the BDCs have minimized the potential impact, referencing the mostly domestic nature of most companies business activities.

However, that’s missing the point because no one really knows where this is going – if anywhere – so no review of a BDC portfolio can tell you anything useful at this point.

We will continue to keep watch and seek to ascertain how the headlines of today may affect thousands of highly leveraged – and thus vulnerable – American companies tomorrow.

Here And Now

For the moment – and for the next several weeks – our attention will be turned to BDC earnings season.

As we said at the top, the initial results have been lackluster, mostly where recurring earnings are concerned.

BDC investors – accustomed to robust profits for the last 2 years – are going to have to adjust to an environment of declining yields brought on by the (1%) drop in SOFR and lower loan spreads.

The BDCs and the analysts have been signaling this shift for a long time, as has the BDC Reporter.

Going by where BDC prices stand, investors do not seem to mind that earnings are dropping, dividends are stuck in neutral or coming down and realized losses are inching up.

What We’d Like To Know

Will that complacency continue?

After all, the U.S. economy continues to expand ; EBITDAs of portfolio companies are still increasing; BDC yields remain very high compared to most other income producing investments and the “private credit” story continues to enchant the markets.

David Golub of GBDC said something similar on the BDC’s most recent conference call.

Omen

However, he also had this warning to offer, which we will quote at length:

At the same time that there are these reasons for optimism, there are also clear signs of elevated credit stress across the market. In the BSL market, the LSTA publishes data about defaults adjusted for liability management transactions. I think that’s the right way to look at it. And their data shows that we’re now looking at a rate of about 4.7% for the 12 months ended December 31. That’s more than double the 20-year average. It’s a little hard to get apples-to-apples historical comparisons now that we’ve entered the era of liability management transactions, but I think that’s about right. It’s about double. Signs of rising credit stress also show up in reports from the major rating agencies, including S&P and Fitch and from major law firms that are covering restructurings and bankruptcies. So there are cross currents in the market that warrant both optimism and concern.

2/5/2025 GBDC CC

What This Means For BDC Investing

Mr Golub went on to argue that potential increased credit challenges will separate the wheat from the chaff where BDCs are concerned:

We think this is the type of environment that historically has separated lenders with strong businesses, lenders with real competitive advantages from the newbies, the firms that lack the characteristics to be successful long-term players.It’s not surprising to us that in the last 5 quarters, we’ve seen increased dispersion in performance among BDC managers, and we expect to see more of this in the coming period. 

2/5/2025 GBDC CC

Hear Hear

We certainly agree with that last point.

Not all BDCs are the same where fundamentals and price performance are concerned.

The main purpose of a publication like the BDC Reporter is to help investors determine who is most likely to succeed over the medium and long term, and who may not.

We’re not so bold as to name names, but we do offer facts, figures and analysis to help you make those determinations.

We are coming off several years of favorable macro conditions which has lifted most everyone’s boat.

The future is likely not to be as kind, so worrying a little – and some stock selection – is called for at this time.

Stakes Are High

However, should the Trump Administration bring the whole financial system down, all bets are off.

We remember all too clearly the days of Lehman Brothers, Bear Stearns and when the leading public BDC at the time – American Capital – traded under a $1 a share and flirted with bankruptcy and even ARCC traded as low as $3.40 a share, a (70%) discount to book.

How can anyone say that could never happen again, and not necessarily with the happy ending that followed?