Unedifying

BDC COMMON STOCKS

Week 33

Blah

The main indices seem to be fearless, unmoved by higher inflation numbers this week and putting behind them the employment scare of a couple of weeks ago which presaged to some doomsayers the onset of a recession.

Nonetheless – as noted above – all 3 major indices rolled on higher price-wise.

Not so the BDC sector which for a 4th week in a row – going by the price of its only exchange traded fund (BIZD) – was in the red.

In percentage terms, the price drop was modest – (0.4%) for BIZD and (0.6%) for the S&P BDC Index, which always seems to offer a slightly different reading than the ETF due to its different construction.

Still, the gap between the major indices and the BDC sector continues to widen. More on why that might be the case later.

Metrics

Given that this was essentially the last week of BDC earnings season, with 5 BDCs reporting results and only beleaguered Prospect Capital (PSEC) not yet checked in, we might have expected more drastic moves in the prices of individual BDC stocks.

However, amongst the 17 BDCs flat/up in price and 29 down, only 1 was up more than 3.0% in price and only 1 down more than (3.0%).

Partial Recovery

The BDC most in the black in percentage price terms was Crescent Capital (CCAP), which reported solid results for the IIQ 2025 after failing to do so in prior sessions.

Net Investment Income and Net Investment Income Per Share (NIIPS) were up slightly quarter over quarter.

The BDC’s Net Asset Value Per Share (NAVPS) barely dropped and – as management pointed out – that decline had more to do with the payment of a “special dividend” announced some time ago than to portfolio losses.

Management seems to be stung by how quickly investors decamped in the wake of a series of lacklustre – but not disastrous results.

As this chart shows, CCAP went from a $20 stock to a $14 between February and just recently.

On its conference call, CCAP made the case for investors taking a longer-term perspective:

Let’s look at performance since CCAP’s public listing in February 2020, a period that captures the totality of the COVID pandemic, the rise in interest rates beginning in mid-2022, and at least part of the recent tariff volatility. Based on publicly available data, the average public BDC saw its net asset value per share declined by 10.5% from the fourth quarter of 2019 to the first quarter of this year. CCAP’s NAV per share increased by 0.6% over the same time frame and 0.3% through Q2. Over this period, we generated a total economic return calculated as change in net asset value plus dividends of 49%, well in excess of the public BDC average. I highlight this longer-term track record as it often feels as if we operate in 90-day earnings vacuums where sentiment can swing wildly, sometimes warranted, sometimes not. 

Source: CCAP-IIQ 2025 Conference Call – August 14, 2025

The BDC did increase in price by 4.7% this week, as the market sensed a possible change in the performance narrative.

Still, CCAP would need to increase 33% in price to return to its 52 week high.

Can CCAP’s “turnaround” – if that’s what’s happening – continue?

Down

The BDC which fell in price by the biggest percentage was MSC Income Fund (MSIF) – the Main Street Capital (MAIN) managed mini-me.

The stock fell (4.3%) to close at $14.24, not far off its 52 week low set some time ago of $13.92.

Like CCAP, MSIF reported solid results as well in that recurring earnings, return on equity and NAVPS were almost unchanged from the prior period.

Management was as bullish as you’d expect in their remarks about the results:

In commenting on the Company’s operating results for the second quarter of 2025, Dwayne L. Hyzak, MSC Income’s Chief Executive Officer, stated, “We are pleased with the Fund’s performance in the second quarter, which resulted in an annualized return on equity of 9% and a favorable level of net investment income per share. We believe that the second quarter results provide visibility to the opportunity for the Fund’s continued favorable performance in the future, with the potential for increased net investment income and dividends as we work to expand the Fund’s investment portfolio over the next several quarters.”

Source: MSIF IIQ 2025 Earnings Press Release

That wasn’t enough to convince a market that has gone from hot to cold to hot again and now back to cold in just a few months since MSIF went public earlier this year:

As with CCAP, we’ll be taking a deep dive into this BDC’s fundamentals to try and understand why investors keep changing their minds about MSIF and whether the current chill is justified.

Notable

We should also point out that 4 BDCs reached new 52 week lows during the week – the most since the time of the “Liberation Day” announcement.

The BDC Reporter covered WhiteHorse Finance’s (WHF) new low – and also the only 52 week high of the week – MAIN – in an article during the week.

Earlier in the week we covered the falls of FS-KKR Capital (FSK); Morgan Stanley Direct Lending (MSDL) and Blue Owl Technology Finance (OTF).

The markets sometimes work in mysterious ways.

The fall of FSK was not surprising given poor IIQ 2025 results and deteriorating credit results. (Anyone interested should have a look at the BDC Credit Reporter which wrote about a deteriorating situation at FSK’s portfolio company – 48Forty Solutions. Unfortunately, there are other setbacks – many of them).

On the other hand, both OTF and MSDL fared pretty well where IIQ 2025 results are concerned.

MSDL is also involved with 48Forty, but has kept its exposure within tolerable levels – a good thing given that ultimate losses could be substantial and a restructuring is underway.

Newer BDCs – like MSDL and OTF, but also MSIF – are not getting the benefit of the doubt from the markets almost regardless of performance.

WHERE WE ARE

Hanging Out

In the last 4 weeks BIZD has dropped from $16.75 to $15.90.

At this point, the ETF is (11.0%) below the year’s highest price – i.e. “correction” territory – and (4.0%) below the level at the end of 2024.

The BDC S&P BDC Index – which includes all dividends received in its “total return – is up only 0.3%.

A month ago, the index was at a 2025 high of 6.1%, even higher than back in February.

Details

Only 13 BDCs out of 44 trading all year are in the black in 2025 and 31 are in the red.

Speaking of the latter, 14 are down (10%) or more, including 5 more than (20%) down and 1 more than (30%) off.

That last BDC is PSEC which has seen its stock price drop slightly more than a third in 33 weeks.

How that story ends is anyone’s guess, but we’ll learn a little more when the fiscal year and calendar IIQ 2025 results are published.

Sadly, in a case of self inflicted wounds, PSEC has a credibility issue where the accuracy of its valuations and even earnings are concerned so even “good” results may not placate an increasingly disengaged market.

Not All Bad

Still, there are 13 BDCs that can boast price increases in 2025 and somewhere near half the BDC universe we track is in the black on a total return.

The trifecta of top price performers are MAIN (12.8%); Sixth Street Specialty (TSLX), up 12.5% and Trinity Capital (TRIN), 10.2% in the black.

We have to add that all 3 BDCs have performed well on a fundamental basis. All 3 booked an increase in NAVPS in the IIQ 2025, but so did 10 other BDCs…

Finally, 12 BDCs are trading at or above their most recent NAVPS. As you’d expect MAIN, TRIN and TSLX are in that group as well.

WHERE WE ARE HEADED

Against The Odds

Maybe a little foolishly, last week we made the case for a bullish 2025 full year result for the BDC sector.

Then and now we argue that most BDCs are performing well where earnings, dividends and book value are concerned; liquidity is plentiful; borrowing costs are being shaved and most exposure is in the form of first lien loans.

We did concede, though, that’s just one of many possible conclusions of this historic year.

Gloomy

At the moment such an outcome seems almost inconceivable.

BDC prices are pushing lower and the macro environment is confusing.

Let Us Count The Ways

The government wants to see short-term rates lower but this week’s inflation readings would seem to argue against any sort of imminent rate reduction.

However, both independent voices and the government’s enablers in and and around the Federal Reserve have introduced a new argument: cut rates to save the economy before it falls and hurts itself.

In that argument inflation readings are irrelevant.

Rates must be cut to save us all.

However, the data is far from clear cut. This week we had a pretty strong reading on consumer spending (2/3rds of GDP as we are always reminded). Also June’s numbers were revised higher.

Nonetheless, the markets are 96% certain a rate cut is coming next month and the Treasury Secretary is hoping for a (0.5%) cut and more to follow for a total of (1.50-1.75%).

Resolution

We just don’t know what to make of all this and we assume most investors don’t either.

Maybe if we get some clarity on these matters BDC investors – who – one could argue – have been taking money off the table since February might find their way back.

Regardless

As a little exercise we pre-emptively rated how we expect each BDC we track to perform on our 1 to 5 rating scale over the course of 2025, based on their performance through half the year so far.

1 means performing better than expected, 2 means as expected, 3 is modest underperformance and 4 and 5 are for further underperformance.

We concluded that 31 would fall into category 1 and 2 and 15 in 3-5.

Foreboding

Our conclusion is that currently investors are more pessimistic than fundamental performance might imply.

That suggests the BDC sector is somewhat “oversold”.

At some point that could reverse.

Full Circle

There are still 19 weeks to go in 2025, enough time for a re-think.

So, we end up where we were last week with a stubbornly contrarian bullish-y view.