BDC COMMON STOCKS

Week 19

All Quiet On Every Front?

Another Fed policy meeting has come and gone, there’s been another week punctuated by endless talk of tariffs and by the debate about whether a recession is on our doorstep or not, and the result is what?

As noted above, the main markets just made a sour face but barely moved.

That’s also the case for the BDC sector – as measured by the price of its only exchange-traded fund with the ticker BIZD – which slipped (0.2%).

The S&P BDC Index – which we also regularly track to get a second reading – was down (0.3%).

Look A Little Closer

Those sector-wide price readings might suggest some stasis during the week.

However, the individual BDC data – there are 46 in our universe – suggests there is more there than meets the eye.

For example, there were a good deal more BDCs in the red (30) than in the black (16) than the modest sector-price change might suggest.

Furthermore, a relatively high number of BDCs dropped (3.0%) or more in price this week.

Not Amused

We suspect the relatively large number of outsized price losers reflect investor disappointment at their most recent results.

8 of the 10 BDCs involved have reported their IQ 2025 numbers and there was plenty of weakness to go around.

The Biggest Loser in price terms was Monroe Capital (MRCC) – down (8.0%) following a drop of (2.5%) drop in its Net Asset Value Per Share (NAVPS). Over the last 12 months – as the BDC NAV Change Table shows – this critical metric is down (7.5%) and MRCC has now posted 13 consecutive quarters (!) of declining NAVPS.

Remarkably, the BDC was seen by many investors as something of a successful turnaround in the last year or two as management managed to maintain its recurring earnings close to its $0.25 per share per quarter dividend.

However, MRCC began 2025 on its back foot:

Now turning to our financial results. Adjusted net investment income, a non-GAAP measure, was $4.2 million or $0.19 per share this quarter compared to $6.2 million or $0.29 per share in the prior quarter, excluding the impact of incentive fee limitations of $252,000 and $1.2 million for the quarters ended March 31, 2025, and December 31, 2024, respectively. Adjusted net investment income would have totaled $3.9 million or $0.18 per share this quarter and $5 million or $0.23 per share in the prior quarter. The decrease of $1.1 million or $0.05 per share in adjusted net investment income after removing the impact of incentives was driven by a lower average effective yield reflecting lower interest rate environment, select asset-specific performance and a decrease in the average size of the portfolio.

MRCC- IQ 2025 Conference Call

Whichever way one counts the earnings, they’re sharply down and likely to drop even further if and when MRCC restarts charging an Incentive Fee.

The BDC did not flinch and announced an unchanged $0.25 dividend for the IIQ 2025 but the writing is on the wall: a substantial dividend cut is coming and is a matter of when, not if.

Foreboding

We did warn a lower level of book value, earnings and – eventually – payout was in the cards for MRCC last quarter. HEre’s how we concluded the article:

By the way, the analysis consensus for MRCC’s EPS has been reset to $0.80, (20%) below its annualized quarterly dividend.

As this YTD chart shows, MRCC’s stock price has dropped (27%) since the market peak in late February:

The BDC is only a few cents away from its all-time low price, established in 2020 and (60%) below its all time high, set in 2017.

MRCC is a grim reminder that a failure to deliver on fundamentals will eventually be reflected in the stock price.

Since that price high in 2017, MRCC’s NAVPS has dropped (40%) and its quarterly dividend by (29%). However, if the dividend drops to 100% of the level of expected earnings, it will be (43%) lower than in 2017 and (20%) than currently.

Not to be a misery guts but given the large percentage of PIK income in MRCC’s earnings and continuing bad debt pressures, we could envisage a cut in the dividend to $0.15 a quarter ($0.60 annual)- (40%) below the current level.

We’ll be delighted to be wrong but the the data is pointing thereto.

Not Alone

Sadly, MRCC is not the only BDC to have reported underwhelming IQ 2025 results from a book value perspective.

We don’t have time here to discuss every one but here are the BDCs that have most not met expectations in terms of NAVPS. We’ve used (5.0%) down or more as a threshold.

Where We Are

Run Out Of Gas

Between March 25 and April 8, BDC prices fell like an anvil in a Looney Tunes cartoon, along with everyone and everything else. Going by the S&P BDC Index, the sector dropped (17%).

There was a recovery from April 9 till April 28, but since then the BDC sector price-wise has been “flat-to-down”.

As of Friday May 9, 2025 the S&P BDC Index is (9%) below the March 25 level and (14%) below the happy days of February when the sector peaked.

Only 4 BDCs – a strange bunch consisting of MSIF, OFS, GAIN and OXSQ) – are up in price in 2025.

Or, looked at another way, every BDC with a portfolio greater than $1.2bn in size is in the red, regardless of whether they’ve performed like MRCC or – say – Bain Capital Specialty Finance (BCSF) or Barings BDC (BBDC), both of whom have posted “solid” results.

Tops

At this point, only 2 BDCs are trading within 10% of their 52 week highs: Great Elm (GECC) and Gladstone Investment (GAIN). The former appeals due to its increased earnings and dividend – even if the numbers are boosted by inconsistent returns on CLO equity positions, and despite a significant drop in the BDC’s NAVPS.

GAIN appeals to investors looking for “special” dividends reaped from equity gains both recent and future.

Lowest

At the other end, there are 6 BDCs trading within (5%) of their 52 week lows and 8 between 5%-10% from the bottom.

Given that most BDCs set new record 52 week lows in the early days of the tariff meltdown, it’s worrying to see so many BDCs trading near those lower levels.

All in all, the BDC sector – with earnings season three quarters done – is not in a great place, even if BIZD is only (7.8%) down in price in 2025 and the S&P BDC Index on a Total Return basis is off (5.9%), neither even in “correction territory”.

Where We’re Headed

If Wishes Were Horses…

This would be a very good time to acquire a crystal ball, but we’ve had no luck in that department.

We’ll just state the obvious.

With trouble likely to be lying ahead in the broader economy and the tariff negotiations turning into a shaggy dog story, the macro environment is not an inviting one.

Furthermore, the BDC-specific data showing that all but a few BDCs reporting IQ 2025 results have seen their NAVPS shrink is not good either.

Even if BDCs are telling us on conference calls that their exposure to tariff-impacted companies is modest, we can’t help surmising that second quarter results will be worse than the first.

Ever Wider?

Moreover, the differential in performance between the “best” and the “worst” BDCs should continue to widen, putting investors who pick the wrong horses to ride at ever greater risk of loss.

Just YTD, the best performing BDC stock is up 5% in price and the worst performer (30%)…

With That Said

We’ve been reading the transcript – no, not the AI-generated summaries – of every BDC that has reported to date, trying to get a sense of some of the trends underway across the sector.

We’re going to wait till the final 12 BDCs report before writing anything but we can reveal that we’ve noted a few countervailing forces underway that should benefit the BDCs even in these uncertain times.

We won’t offer any spoilers here, but stay tuned.

There are very real shafts of light amidst the doom and gloom.

The market seems to think so as well or BDC prices would be much, much lower than they are.

The next 6 months or so are going to clarify the situation a great deal – unless the Trump Administration adds new jokers to the pack.