BDC COMMON STOCKS

Week 34

All Quiet

With nothing else going on and with half of America on vacation, the financial press worked themselves up all week about Chairman Powell’s speech at Jackson Hole.

Of course, the sole object of this fevered interest is whether the Fed will cut interest rates at their next meeting in September.

This makes no sense because the very point of speeches like these is to tell us nothing about this subject, which leaves Chairman Powell and the Fed governors room to maneuver all the way up to the last minute.

That’s a reasonable approach because every data set coming out right now provides a contradictory picture compared to the one before.

We Read The Whole Speech…

With that said, Chairman Powell did break new ground at Jackson Hole, with a long discussion about the Fed’s “monetary framework” and just revised “Statement on Longer-Run Goals and Monetary Policy Strategy”.

Sadly, most observers, nonetheless, reverted back to “What does this mean about a rate cut – or not – in September?”.

What followed were headlines from every publication imaginable where the words “rates” and “cuts” consistently featured.

Following the speech, the market consensus remained that rates will get cut by 0.25% in September. Tthe Bessent-and Trump favored 0.5% cut hardly gets a mention.

Token

Effectively, the Fed will throw the administration a rate cut bone to avoid the charge that they acted too slowly to save the economy from the slowdown that those recent weak employment numbers might be presaging.

Here’s the twist. That might be all the Fed under Powell might do, especially if inflation continues to rear its ugly head and the U.S. economy muddles through – as it has done every year since the GFC, except for a brief period at the time of Covid.

US GDP Annual Growth Rates (2009-2024)

Sincere Question

As an aside, why do so many commentators believe we are on the verge of an economic precipice based on one “bad” employment report?

We’re going on about this subject because the knock on effect of these rate decisions will greatly impact BDC results for years to come, not to mention corollary issues like the level of M&A activity; capital raising in private equity and private credit, how BDCs fund themselves and on and on.

Best Case

For BDC investors, a (0.25%) drop in the Fed Funds rate in September that is NOT followed up by further rate cuts this year and next should the Fed decide to hold its ground against inflation would be one of the most positive outcomes, just behind no cut at all.

Ear To The Ground

Frankly, from what we’re hearing from the BDCs themselves about their thousands of highly leveraged companies across the country, business conditions are generally good. We have been told repeatedly by a series of BDCs that – on average – revenues and EBITDA are growing year over year – from single digit to double digit percentages.

BDC financed company bankruptcies are low, restructurings are only happening at a moderate pace and as we’ve noted before many BDCs report non-accruals and under-performing assets are at record low levels compared to historical averages.

Even the BDC managers themselves sometimes express surprise at how well their portfolios are performing.

We’ve listened to 45 conference calls from asset managers large and small who collectively have a window into every nook and cranny of the economy both through their BDCs and their other funds and not one has raised their hand to warn of deteriorating borrower fundamentals, except in “idiosyncratic” situations.

What is a more reliable indicator: one poor employment report or the real world performance of tens of thousands of companies?

Outside Looking In

From our standpoint, the data supports little or no further rate cuts for as far as the eye can see but we’re aware that this is not the consensus.

The current market consensus regarding Federal Reserve interest rate cuts in 2026 suggests moderate to significant easing, with expectations for the federal funds rate to decline from the current 4.25%-4.50% range to approximately 3.00%-3.75% by the end of 2026.

Then there’s the Fed itself:

The Fed’s own projections from their June 2025 dot plot indicate a more conservative approach, targeting a federal funds rate of 3.50%-3.75% by the end of 2026. This represents approximately 0.75 percentage points of cuts from current levels, suggesting two to three quarter-point reductions throughout the yea

If we get into projections by the big firms, there is a wide variety of opinion that we won’t burden you with.

Everyone believes rates are coming down, but by how much and when covers a wide spectrum of possibilities.

Right Field

Then there’s the political dimension, which we’ve discussed before.

If the President gets his way – and we’re not ruling out the financial establishment bending the knee before long – both the rate cuts and the timing of lower rates could be accelerated.

Throwing Up Our Hands

This makes projecting BDC earnings more than a few months out impossible.

All those BDC earnings estimates for 2026 are well nigh meaningless under these conditions – much more so than historically has been the case.

For anyone long the sector there’s a strong possibility that prices could be sharply marked up or down as the picture crystallizes.

Waiting

At the moment – as reflected in the BDC exchange traded fund with the ticker BIZD – which almost unchanged in recent weeks – investors just seem to be hanging around.

BIZD was up 0.3% this week, after being down (0.4%) the week before.

As you can see from this chart, BIZD has been in a narrow range since mid-May: 3 months ago:

This week in which there was virtually news of any sort except the hush hush developments at OFS Capital (OFS), which we covered in a last minute article on Friday – 33 BDCs were up in price and 13 were down.

The fact that Hercules Capital (HTGC) saw its BBB+ rating from Kroll affirmed; that Main Street (MAIN) listed itself on the Texas NYSE and that Portman Ridge (PTMN) changed its name and ticker as promised is not market moving news.

(However, we did write a brief piece about PTMN, just to record this unusual transition. To be fair Apollo Investment, with the ticker AINV, made a similar transformation into MidCap Financial and the ticker MFIC, several years ago, and that has gone well).

Principal Movers

3 BDCs were up 3.0% or more and 2 were down (3.0%) or more.

By BDC standards, that’s a quiet week.

The three BDCs up by more than 3.0% are all the “walking wounded” – BDCs that have not been performing well and whose prices – till this week – have been in the dumps as this extract from a Seeking Alpha table shows:

Clearly, would-be bargain hunters have been busy buying up BDCs that were recently at their 52 week lows.

Admittedly, the story at Monroe Capital (MRCC) is a little different because the BDC is about to be sold for book value, but the shareholders will be receiving Horizon Technology Finance (HRZN) – possibly something of a tainted fruit.

HRZN itself closed the week at $6.98, not far from its 52 week low of $6.77.

WHERE WE ARE

Repeating Ourselves

Given that not much changed where BDC prices were concerned this week, the sector remains in that neither high or low orbit that followed the partial recovery since “Liberation Day”.

The main indices have gone on to bigger and better levels since the April frisson, but not our sector, which is neither hot or cold.

BIZD is (10.8%) off its February 2025 week high and (4.1%) in price terms below the year-end 2024 level.

On a total return basis – the better way to measure these things – the BDC sector is 0.9% ahead in 2025, embarrassingly way, way behind the S&P 500 which is up 10.9%.

Going by Seeking Alpha data, only 14 BDCs out of the 44 that have been trading all year are in the black in 2025.

However, as we like to remind our readers every time we mention that unedifying statistic, about half all BDCs are profitable when dividends received so far are factored in.

If we were to end the year here this would be considered something of a “nothing burger” result but the good news – or maybe bad news – is that there’s still plenty of time for things to change, and we expect them to in the autumn and early winter.

WHERE WE ARE HEADED

Artfully Done

That’s the perfect segue for our weekly peer into an unknowable future, but which we tackle anyway.

Frankly, we don’t have much to add above what we said at the top and in prior editions of the Recap.

No Spark

Our only contribution is that – from this vantage point – we don’t see many catalysts for BDC price changes until the next Fed meeting in mid-September.

The markets may jump around following one bit of of economic data or another but any meaningful change will probably wait till the Fed opines, unless the Trump Administration does more than complain and actively seeks to upend both Chairman Powell and his acolytes first.

We won’t be hearing from the BDCs themselves for IIIQ 2025 earnings season till early November – which seems like an age away.

(Note that Prospect Capital (PSEC) – an “idiosyncratic” BDC if there ever was one – will be reporting its fiscal year results through June 2025 next week).

A long stretch lies ahead where macro developments will be the factor most likely to move BDC prices.

Shaggy Dog Story

However, as we’ve said above, even a September rate cut of 25 basis points won’t truly give us a sense of direction because we might be “one and done” situation or “the first of many”.

Maybe the picture won’t be clear till May 2026 when Chairman Powell’s term as supreme leader ends.

It Could Happen

Should the Administration gain control over the levers of monetary policy at that point, the picture might get clearer as rates get slashed, and quickly.

Need we say that won’t be good for BDC earnings and will radically re-shape the financial world we’ve known all our lives.

That’s saying something because the BDC Reporter is long in the years and has never had to contend a situation when the government holds all the leashes of our capitalist system.