Tumbling Down

BDC COMMON STOCKS

Week 31

Bad, Bad , Bad

The major indices may have dropped between (2.4%) and (2.9%) in price terms this week, but the BDC sector fared a lot worse.

In fact, in terms of the percentage drop in the Van Eck sponsored ETF with the ticker BIZD which owns most BDC stocks – which amounted to (4.3%) – this was the worst 5 day period since “Liberation Day” in April.

Of the 46 public BDCs we track, 42 were in the red.

Again, the last time there was so much red ink flowing through the streets of BDC-land was in early April.

Furthermore, 30 BDCs were down by (3%) or more, exactly the same large number as we saw in the first two weeks of April.

Less spectacularly, the number of BDCs trading at or above book vcalue – which yad been on the rise – fell back from 15 to 13.

See the just updated BDC NAV Change Table.

Reason Why

Although this mini price bloodbath coincided with the first week of earnings season, we’d argue that the sudden loss of confidence had a lot more to do with the macro than the micro.

Most of all – but impossible for us to prove – BDC investors are likely to have begun hyper-ventilating about the state of the economy.

Once again – and we’ve been here on multiple occasions in recent years – investors are likely pulling out the “recession is coming” playbook.

Rule 1 of that playbook is “sell credit investments and ask questions later”.

Even a broken clock is right twice a day, so we cannot say with confidence that those concerns are incorrect this time round, even if a Wednesday strong GDP report had the markets believing the Fed was less likely to cut rates because everything was awesome.

So what is it? The beginning of a new “Golden Age” or of a long, slow slide into economic contraction and woe?

Hopefully Not

If the latter – and as we’ve said before – that’s a worst case scenario for BDCs whose portfolio companies will have to contend with credit challenges; new investment activity will plummet and – most of all – interest rates will be cut by the Fed in a desperate attempt to right the ship.

Lower rates = lower income for BDCs, which translates into lower earnings and the cutting of dividends.

Quantified

Here’s a telling example drawn from Ares Capital’s (ARCC) just published IIQ 2025 filing.

We’ve used ARCC’s own table which shows the impact on income, expenses and earnings at different levels of rate reduction.

Very much on purpose, let’s look at a “worst case” (300) basis point reduction:

The ($354mn) reduction in Net Income is not the same as how much the earnings would drop because there are other variables such as a lower Incentive Fees that would ensue and a host of other factors that would play out if we got such a drop in rates.

Nonetheless – and very roughly – ARCC’s profitability could drop by (20%)-(25%) as its top line yield would fall – everything else equal – from 10.9% on income assets to 7.9%.

The impact on every other BDC would be different, so we suggest investors dig down into those 10-Qs to ascertain what might happen to their favorite players on a pro-forma basis.

WHERE WE ARE

Drastic

The change of tone is obvious in the metrics we follow.

BIZD – which had finally gotten ahead in price terms versus its 2024 year-end level is now (4.0%) in the red.

The better gauge of BDC performance is the total return calculation, which is now only 1.4% in the black.

Sadly, the number of BDCs whose stock price was in the black in 2025 YTD has dropped from 21 two weeks ago – when this move began – to only 10, out of 44 stocks that have been around all year.

In 2025 we’ve gotten to a low of only 5 BDCs in positive territory, so there’s a little way to go.

Half Full

On the other hand, the BDC sector did have a decent leap forward in advance of earnings season where prices are concerned.

As a result, both BDC sector and individual price levels are not yet at tearing out your hair levels.

If it’s any comfort, BIZD remains 18% above its 52 week low price of $13.50 set in the darkest days of April.

For the record, that’s (24%) below the BIZD 52 week high.

Not Too Bad

Our back-of-an-envelope calculation suggests about half the BDCs are in the black on a total return basis even now.

A golden few are even having a very good 2025, such as Sixth Street Specialty (TSLX) and Main Street Capital (MAIN) and a slightly greater number have little to complain about like ARCC, Gladstone Investment (GAIN); and Capital Southwest (CSWC).

For reasons we cannot fully explain, even OFS Capital (OFS), which reported a big drop in book value this quarter and has a multitude of credit challenges, is showing up in solidly in the black.

Balanced

Still, we count 12 BDCs down by more than (10%) in price in 2025.

The worst of the worst is Prospect Capital (PSEC), which has fallen by (31%) in 31 weeks.

We mention PSEC specifically because this week the BDC’s stock price reached another 52 week and all time low of $2.96.

See the lifetime price chart below:

Important

The question we ask ourselves – and for which we do not have an answer – is whether this unrelenting price decline is a question mark about the BDC’s ability to continue as a going concern.

Management would say “absolutely not”, but “never say never” in the face of such a cold shoulder by the markets.

Despite recently shrink wrapping its payout, PSEC still offers the adventurous investor an 18.2% yield – which may be more trap than opportunity.

Unfortunately, the opaque nature of PSEC’s disclosures make evaluating PSEC’s true worth well nigh impossible.

Our sister publication – BDC Best Ideas – dropped coverage many months ago because of that very opaqueness.

WHERE WE ARE HEADED

Three Roads Diverged

Of course, there is an infinite number of ways the rest of 2025 could play out.

However, here are our three favorite scenarios from the multiverse.

First, the sudden onset of doubt that began in mid-week that caused BIZD to drop (3.6%) in a very short time could continue and blow into one of those malaises that we’ve seen before about the future direction of the economy.

Those sort of shivers can bring down BDC prices very sharply, very quickly and by a great deal – as occurred in 2022 when BIZD fell from late March through late September by (25%).

No recession turned up, though, and BIZD subsequently went on a multi-year 32% increase that peaked in February of this year.

Even a few days ago we were only 5% away from that February peak.

This time if we get the “no recession” all clear expect a similar revival in a few months but – probably – only after many investors have ducked out of the market – just in case.

At Last

Second, we could actually get the “Waiting For Godot” recession that we’ve been promised since 2008-2009 (which included a brief taste in the spring of 2020 surrounding Covid).

Almost certainly – whether President Trump gets his way with interest rates or not – rates will come down a lot, and we’ll get a scenario like the one we’ve already discussed above.

Such an eventuality could push BDC prices down even more than (25%). Maybe as much as (50%) as investors try to find a bottom, but who knows? Will there be a financial crisis as well, like in 2008-2009?

Buck Up

The third alternative is that investors pull themselves together and return to the generally optimistic tone of recent weeks, including the expectation that interest rates will remain close to where they are at the moment, or just a little bit lower.

Such a consensus would be good for BDC stock prices and we may see them meet or exceed the levels of two weeks ago; yields would remain high and all would be well with the BDC world.

We seem to be at an inflexion point but even that could just be a momentary loss of confidence due to the weak payroll numbers and tough talk on tariffs.

Irrelevant

Going by BDC results in the just completed first week of earnings season, the least important factor where prices are concerned seems to be actual recent performance.

Overall, we’ve officially heard from 5 BDCs in all and been given glimpses and previews by several more.

All this early stage opening of the kimono has confirmed – so far – that tariffs are not having any material impact on BDC portfolio values; credit results are pretty much as expected with most players not adding any new non-performers; book values are behaving as one would have expected and so are earnings and distributions.

If BDC prices are going to continue tumbling there’ll be little correlation with the dozens of IIQ 2025 results headed our way.

Should that change, the readers of the BDC Reporter will be the first to hear.