Never Say Never

BDC COMMON STOCKS

Week 30

Stalled Out

Once again the main indices charged ahead while leaving the BDC sector in their dust.

For example, the S&P 500 was up 1.5% for the week as a whole while BIZD – the BDC exchange traded fund which we use to measure price performance – fell (0.1%).

The other index we turn to for BDCs – ironically and confusingly prepared by S&P – declined (0.2%) in both price and total return return terms.

For the first time in 5 weeks there were more individual BDC prices down that up: 27 versus 19.

No BDC increased more than 2.7% and Palmer Square (PSBD) had the largest downward price performance at (2.98%) – just short of our (3.00%) threshold.

Notable

In a week with little worthy of note, 2 BDCs reached new 52 week highs: Main Street (MAIN) and PennantPark Investment (PNNT).

Both these BDCs, though, have been setting new 1 year price records of late, so this is hardly breaking news.

Wondrous

Nonetheless, let’s take a moment to have a look at MAIN’s lifetime stock price chart as the popular BDC reached a new all-time high of $66.39 on Thursday.

MAIN is trading at a remarkable 2x book value, way better than even its fierce rival in this department – Hercules Capital (HTGC) – whose premium is 68% over book.

Just how elevated is MAIN’s price?

Valuation

Going by the recently announced mid-point of IIQ 2025 earnings of $0.99, and annualizing, MAIN is earning $3.96.

The 52 week price high to those earnings is 16.8x – a PE like no other we can remember.

By comparison, Ares Capital (ARCC) – popular in a different way – has a PE of 11.8x.

Over at BDC Best Ideas, we calculate an average PE from 42 BDCs and that comes to 9.5x.

It’s no wonder that there are so many pundits either calling MAIN over-valued, or shorting the stock – or both.

WHERE WE ARE

Same

Given there was virtually no change in BDC prices this week and no developments to speak of – which is why you’ll see no BDC News In Review this week – there isn’t much to say that wasn’t said last week.

WHERE WE ARE HEADED

So Close

However, we are finally on the doorstep of IIQ 2025 BDC earnings season. See the BDC Earnings Calendar in our Subscriber Tools.

We begin with ARCC, followed by Sixth Street Specialty Lending (TSLX) and HTGC.

These are 3 very different BDCs by size, segment and market strategy, which will be instructive.

ARCC and HTGC’s earnings are expected to be slightly higher than the first quarter’s andTSLX’s a little lower.

Much Else Besides

However – as our readers know very well – investors will be looking far beyond the headline recurring earnings for a sense of how all 3 of these BDCs are doin more broadly.

There’ll be talk about the impact – or otherwise – of tariffs on portfolio companies and discussion of how new investment activity froze in April but began to revive in May and June.

We expect to hear that spreads on what new loans were made were more or less in line with the prior period.

Anyone expecting spreads to balloon out – as they did three years ago – in response to the uncertainty out of Washington D.C. will be disappointed.

From what we hear every new deal offered in the market in the second quarter was fought over in every segment of the market.

There is so much money out there looking for a home – and an ensuing management fee – that spreads are unlikely to have improved.

Better

On the credit front, all 3 BDCs have been performing better than most of their peers and their own historical averages.

We wouldn’t be surprised to see some credit deterioration in some – or all three – but are not expecting any sort of reversion to the historical credit mean.

Bonus

Moreover, ARCC has been hinting that some sort of realized gains might get announced this quarter which – at the very least – might help to offset the ($61mn) in net realized losses of last quarter, ($55mn) in 2024 and ($179mn) in 2023.

Remarkably – and largely thanks to constantly issuing new shares at an accretive premium to book – the market leading BDC has managed to increase its net asset value per share by 7.7% since the end of 2022, those realized losses notwithstanding.

Spilled Over

ARCC, like most other BDCs big and small, continues to sit on a small mountain of undistributed taxable income that has boosted book value as well.

Those mountains will erode in the quarters ahead at some BDCs but not by much – if at all – at ARCC, HTGC and TSLX.

We’d like to safely say that all three have sufficient resources to maintain their current payout levels not only in 2025 but through 2026 – and beyond.

Known Unknown

There’s an asterisk that needs to be mentioned here.

If the Trump Administration gets it way with the Federal Reserve where interest rates are concerned, all bets are off for future BDC earnings and distributions.

Need we say, this would be a dramatic change in direction for rates – even if not occurring in one fell swoop?

Just a clear direction downward over a few quarters would be enough for analysts to re-calibrate all their calculations and – most likely – cause BDC prices to drop.

We’d be right back – or very close to – the days of zero interest rates of 2021, compounded by that surplus of capital in the private credit markets.

Yes, rates would drop for other high yielding investments that vie with BDCs for investors attention but – in our view – the impact on future BDC earnings and distributions would be epic, and likely to cause investors to initially run for the exits.

Unprepared

Clearly, with BIZD trading only (6%) off its 52 week high and 15 individual BDC prices less than (10%) off their apogees, investors are not pricing in a radical change in the American interest rate regime.

That makes the risk of this happening all the more potent in terms of its potential impact.

Huge Drop

For example, ARCC’s yield on income-generating investments -i.e. most of its revenues – would drop by one-third if the Fed Funds rate dropped to 1.0%.

This would happen very quickly and would be only modestly offset by lower borrowing costs on its floating rate-tied secured borrowing facilities.

In many cases across the BDC universe, the cost of lending would be substantially higher than the income therefrom while management fees and most other costs – except for incentive fees – would be much unchanged.

No Good Deed

All those BDCs that have carefully issued fixed rate debt in recent years to add safety and predictability to their balance sheets would be caught flat footed.

The dozens and dozens of privately placed fixed rate unsecured notes BDCs have issued – all of which have “make whole” provisions – would take up to 5 years to unwind.

There are 92 different BDC bonds in the recently launched Hilton BDC Corporate Bond ETF, which we discussed on these pages a few weeks ago.

Whopper

If the Trump Administration fully has its way, the impact on BDC prices could be far greater than what was experienced in April surrounding “Liberation Day”.

As a result, while we march our way through the facts and figures of earnings season, we’ll be keeping a wary eye on what is happening in Washington D.C.

If Chairman Powell not so unexpectedly folds under the pressure, we may witness a market reaction even before a new leader is announced.

Tough Place To Be

Already, besides the constant griping by the President there has been the threat of putting the Chairman in handcuffs by a “Trump ally”:

Rep. Anna Paulina Luna, a Republican lawmaker and Trump ally, submitted a referral to the Department of Justice accusing Powell of perjury related to his testimony about the Federal Reserve’s renovation project. Luna urged the DOJ to consider criminal charges for allegedly lying under oath, which—if pursued—could hypothetically lead to prosecution, as perjury carries potential prison time. This action is a criminal referral from a member of Congress and not an order or threat from the president or the executive branch itself.

We could envisage a scenario where Chairman Powell – who’s term ends in May 2026 anyway – throws in the proverbial towel.

Couldn’t you? Wouldn’t you?