BDC COMMON STOCKS

Week 21

THIS WEEK

Up And Down And All Around

For a reason that is abundantly clear to everyone, the major markets were in mid-level turmoil again this week.

We had mused in our prior article whether last Friday’s Moody’s downgrade of the USA’s credit rating might spook investors, but that was not the case.

This week’s turmoil was the result of the threat of uber-tariffs on the EU – and Apple/Samsung et.al.

As we see above, the main indices all dropped by an almost identical percentage on the week.

Not So Bad

The BDC sector’s prices did not drop as much. Going by the price of the BDC exchange traded fund with the ticker BIZD – our go to source for price discovery – there was only a (1.4%) pullback.

The S&P BDC Index – calculated on a price only basis – fell (1.5%).

Going by recent history, this was a modest downward move and on Friday – when most stocks were in the red – BIZD was in the black.

We don’t really understand why.

Details

40 of the 46 BDCS we track dropped in price and 6 were up or unchanged.

No BDC increased by 3.0% or more – always a difficult feat when the tide is against you.

Chillingly, though, there were 10 BDCs dropping (3%) or more. Here is the list:

Unrelenting

As one can see, the Biggest Loser this week – and a cause for ever growing concern – is the price of Prospect Capital (PSEC) – down by nearly (10%).

There’s no news out of the $6.9bn BDC that explains this price drop.

As always, PSEC has been busy issuing and retiring debt and preferred stock (which counts as debt for regulatory purposes), but that’s not the cause of this continuing slump.

The BDC reached a new 52 week low this week of $3.30, also an all-time nadir.

At its apex – back in 2006 – the stock was approaching $19 a share, which illustrates how far PSEC has fallen.

This year alone – according to Seeking Alpha – the stock price is down (23%) and over 12 months (40%).

This is not a price retreat but a rout.

Unconvinced

We imagine investors don’t believe PSEC’s promise to re-position the BDC, transforming the portfolio into something more akin to what most of its peers are doing – financing middle market buy-outs.

It probably does not help that PSEC’s net asset value per share (NAVPS) dropped (7.5%) in the most recent quarter and (19.4%) in the last year.

Management cannot seem to publicly concede that their outsized commitments to investing in real estate and the equity portions of Collateralized Loan Obligations (CLOs) were a mistake.

Moreover, we had the distinct impression, PSEC was swearing off holding huge individual positions in a few “Control” companies yet – as we wrote about last month – acquired LendNation – a consumer finance company.

We don’t know what’s going to happen next, but a reverse stock split seems likely with the price so low.

Not Alone

Unfortunately for the public BDC sector PSEC is not alone. An increasing number of BDCs are under-performing both in terms of lower NAVPS and price, although the two lists are not identical.

Let’s have a look at NAVPS first.

As we’ve mentioned previously, 13 BDCs have recorded a loss by this key metric of (6.0%) or more in the past 12 months and 16 are off (16%) or more since 2021.

Another 2 BDCs are down (4%-6%) in the last 12 months and 4 since 2021.

Depending where you want to look as many as 20 BDCs are some way off the BDC ideal of a “stable NAV”.

Tale Of Two Cities

Thankfully, there are also 19 BDCs that since 2021 have managed to increase their NAVPS, or incurred a very modest erosion.

The contrast in performance between the two groups is getting ever more distinct.

Black And Red

On the price side, in the past year, 12 BDCs have dropped (20%) or more in price and 25 are down (10%) or more.

Only 13 BDCs are in the black.

Admittedly, the last 12 months includes the recent market pullback, but the numbers are still telling.

WHERE WE ARE

Neither Here Or There

With 21 weeks of 2025 gone, BIZD is down (4.9%) and the S&P BDC Index on a price basis (5.2%) off.

On a total return basis – to our minds the most appropriate way for a BDC investor to measure performance given that BDCs are so generous in their payouts – the sector is down (2.6%).

At worst – using week end numbers – we’ve been down as much as (10.6%) in 2025.

The Few

The stock price of only 7 BDCs is in the black.

Also telling – in a disconcerting way – is that only 11 BDCs are trading at or above book.

Grasping At Straws?

It’s worth noting that investors have not given up on BDCs altogether.

Even after the turmoil of recent weeks, there is 1 BDC trading within 5% of its 52 week high – set this past week.

That’s Gladstone Investment (GAIN) , benefiting from being a lender and successful equity investor in the lower middler market and sharing the wealth of the latter with its shareholders.

Then there are 5 BDCs trading 5% to 10% off their highs.

Here are the tickers: ARCC, BXSL, GECC, SAR and SLRC.

If you were to believe what we write in BDC Best Ideas that list should be both different and longer, but investors are in a cautious frame of mind, and who’s to blame them?

WHERE WE’RE HEADED

Quiet Period

We still have over a month to go till the end of the second quarter. Then there’s another month till IIQ 2025 earnings season begins.

Then we’ll hear how several months of higher tariffs and economic uncertainty has weighed on portfolio company valuations and on BDC performance.

Wrong Most Of The Time

In regards to the latter, over at BDC Best Ideas we attempt the almost impossible – projecting where every BDC’s NSAVPS will trend.

We expect there will be a step down in some companies valuations – and thus in NAVPS – in the period if financial performance is impacted.

Moreover, with more and more BDCs earning less than they’s committed to pay in dividends that should also erode book values.

Nor will we see the accretion from selling shares at a premium to book that has been so common in recent quarters, which has modestly boosted NAVPS.

Pluses

On the other hand, some BDCs have likely used the opportunity of the recent price meltdown to buy shares back at a discount as analysts are constantly inveighing on them to do on conference calls.

Most importantly, SOFR has now remained unchanged since December 2024 and that should continue through the first half of the year and – arguably – through the IIIQ.

In the IQ 2025 earnings and loan yields were impacted by a full quarter’s worth of lower SOFR.

In the IIQ and IIIQ that’s unlikely to be the case and the long erosion of BDC spreads seems to have reached a (temporary) end. In fact, a few BDCs have joyfully pointed to increased spreads on new loans even in the IQ 2025.

As a result – and especially for BDCs who do not rely on fees or OID harvesting for their profitability – earnings should remain stable.

That may not sound like much but a few months ago when the analysts were prepating their 2025 forecasts the consensus was that SOFR would be dropping by now, and with it BDC earnings across the board.

We also expect several BDCs to announced realized gains in the IIQ, which might result in more income to distribute.

All in all, we don’t expect the IIQ 2025 to reflect – as yet – the turmoil in the economy where BDC earnings and NAVPS is concerned.

Timing

If a tsunami of credit problems and lower BDC earnings and NAVPS is headed this way as many believe, we likely won’t feel the wave till the third or fourth quarter at the earliest.

What we’ll be looking most for – while wearing our BDC Credit Reporter hat – are a slew of NEW BDC portfolio companies in the midst of taking protective actions such as switching from paying interest in cash to PIK; loan maturity extensions and full fledged restructurings.

The BDC themselves – given that they are on the phone to their borrowers frequently and receive financials – will know something is amiss before almost anyone else – so we’ll be paying close attention to tghe meta messages coming from them as well.

Measuring Tape

As we write, the BDC Credit Reporter has identified about 130 Important Underperformers across the BDC universe. These are the worst performing BDC-financed borrowers with significant capital at risk.

Should that list of Important Underperformers materially increase, we’ll start to sweat and so will the BDCs and their shareholders.

Unequal

Don’t get us wrong – our research suggests most of the BDCs out there can withstand whatever the economy might throw at them and NAVPS won’t ultimately decrease by more than (10%) for most players.

We’re worried mostly about some of those BDCs – like PSEC – that are already credit strained and might not “survive” a pro-forma downturn in their current form.

There are a few BDCs out there – mostly smaller ones – whose strategic approach has always been questionable and might not have the resources to continue should economic and financial macro conditions darken.

Maybe investors have come to the same conclusion and the red ink we’ve commented on above is investor “front running”.

On a day to day basis the markets are as jumpy as a cat on a hot tin roof and prices can go anywhere but in the long run fundamental performance matters.

As always – and even while we wait for earnings season – this is going to be an interesting period, especially as the macro inputs show no sign of settling down and pretty much anything could happen to all the markets.