Stuck

BDC COMMON STOCKS

Week 32

You Go Your Way. We’ll Go Nowhere

Once again, the paths of the major indices and the BDC sector went off in different directions.

The former – after taking a breather a week ago Friday, due to a soft jobs reports, returned to its upward path.

The latter – measured both by the price movement of its only ETF with the ticker BIZD and the price of the S&P BDC Index – was modestly in the red.

BIZD fell (0.1%) and the S&P version fell (0.4%).

Curiously and confusingly, a good deal more individual BDCs went up in price than fell – 32 to 14.

Moreover, there was a lot of movement under the surface, with 10 BDCs up 3.0% or more and 6 off in price by (3.0%) or more.

The number of BDCs trading at or above net asset value per share (NAVPS) declined slightly to 12, from 13 the week before.

Bottom

Two BDCs reached new 52 week-lows.

One of those was Prospect Capital (PSEC), continuing a recent tradition of finding ever new depths to plumb.

A little sadly, the new public BDC on the block, also hit a new low.

That’s the Blue Owl venture debt BDC which launched on our screens in June, with the ticker OTF.

This chart shows the consistent descent of its stock price, including the recent increase in trading volume as more and more shareholders bailed:

This is how OTF’s CEO – whom we already know from his helming of Blue Owl Capital Corp (OBDC) – summarized the venture debt BDC’s performance on the first conference call:

Since inception, OTF has generated NAV growth of approximately 17%, demonstrating the strength of the portfolio. Credit quality continues to be excellent and is one of the best in the BDC industry, which we think reflects the attractive credit characteristics of software. Our non-accrual rate is less than 3 basis points of the portfolio at fair value. And moreover, OTF has generated 16 basis points of net gains since inception. This compares well to the broader BDC industry, which has experienced roughly 40-plus basis points of net losses on average.

OTF IIQ 2025 Conference Call

All this has been in vain – so far.

Since opening at $17.15 a share on June 17, 2025, the stock has dropped (13%) in price.

Once we get a minute now that earnings season is winding down we’ll undertake a thorough first look at this BDC with something of a unique franchise in the upper, upper reaches of the venture market – already larger in terms of AUM than the wily old veteran Hercules Capital (HTGC).

Highlight

There was a slew of BDC news this week, mostly financial results for the IIQ 2025.

However, the most surprising and important development was the decision by the Monroe Capital organization to sell off all the assets of its middle market focused BDC Monroe Capital Corporation (MRCC) and use those proceeds to invest in Horizon Technology Finance (HRZN), also a BDC under its tutelage.

We covered the subject exhaustively in a Premium article this week, so we won’t cover the same ground again.

MRCC shot up in price because its assets are being acquired by a non-traded Monroe-managed BDC at par.

Last we’d heard – back in the IQ 2025 – MRCC’s book value was $8.63.

MRCC’s stock price increased 10% and ended at $6.85.

“Normally” if a BDC was being acquired at par we’d have expected a much more robust price increase.

However, MRCC’s shareholders may be asking themselves whether they are going from frying pan to fryer given HRZN’s baleful track record in recent years and its still being assembled new management team.

HRZN’s stock price dropped over (3%) in the wake of the news and that MRCC shareholders will soon own 37% of the BDC’s expanded share base.

Blackjack players will recognize Monroe’s strategy for its venture debt BDC as “doubling down”.

Will the shareholders of both BDCs – typically supine in these situations – vote the deals through?

Probably, but we’ll be interested to see what pushback might occur, especially as no other alternative appears to have been considered by the “independent directors” of the two public BDCs.

WHERE WE ARE

Between Week 31’s price drop and this week’s nothing burger, the BDC sector – as measured by BIZD – remains in the red on a price basis: down (4.0%).

As of Friday, BIZD is (10.6%) below its 52 week high set in February – i.e. in “correction mode” where its price is concerned.

The picture is a little less dire if we look at the S&P BDC Index calculated on a total return basis with 7 months of the year in the back mirror: up 0.9%.

That’s nothing to write home about nor is the fact that in 2025 only 14 of the 44 BDCs that have been trading all year are in the black.

Casualty Ward

Some BDCs have taken it on the chin price-wise in 2025. According to Seeking Alpha, 14 BDCs are down by a double digit percentage.

Here’s this long and disappointing list:

Not surprisingly PSEC is top of the class and a bottom may not yet have been found.

Otherwise, going through all those names, the most common attribute is “poor” credit performance and an eroding NAVPS.

We cross-referenced every name on the list with the BDC NAV Change Table and the column therein showing each BDC’s NAVPS change in the last 12 months.

Every single BDC is in the red and some by momentous percentages.

However, some of the price drop is due to some BDCs that were performing well stumbling of late.

Investors are not forgiving and bailed early but could just as easily flow back in – as they did for CION Investment (CION) this week after the BDC booked an increase in NAVPS after three consecutive periods in the red. See below.

Crescent Capital (CCAP) comes to mind amongst the 10 BDCs yet to report.

Flip Side

Let’s not linger too long in the red.

After all – by our estimate about 25 BDCs are in the black on a total return basis, including a handful that are having a wonderful 2025, outstripping even the S&P 500.

Top of the tree is Sixth Street Specialty (TSLX), followed by Main Street Capital (MAIN) and Trinity Capital (TRIN).

Assorted Mix

If nothing else that list illustrates that no one segment of the leveraged lending market is the “right place to be”.

Going further down the list, you’d find that all 5 different segments which we believe the BDC sector serves has one or more players generating a decent total return.

Truth Be Told

If you’ve chosen the right BDCs in 2025 you could theoretically be achieving a total return 4x higher than the S&P BDC Index and twice that of the S&P.

It’s those kind of numbers that remind us why we launched all three of our publications: to try and identify the best BDC performers for market beating returns.

WHERE WE ARE HEADED

Deer. Headlights.

Last week amongst an infinite number of possible ways forward we highlighted 3 scenarios.

The third was that investors would “pull themselves together and return to the generally optimistic tone of recent weeks ” following the poor job numbers.

That’s pretty much what happened to the main indices as we saw at the top.

However, BDC investors didn’t jump on that bus, nor did they continue to fret about a recession tsunami headed to these shores.

The deluge of earnings we received did not help clarify the situation.

There were no great surprises in the welter of numbers, transcripts and investor presentations.

As David Golub predicted on Golub Capital’s (GBDC) conference call – a subject of a recent article – the BDC “winners” continued to “win” and the “whiners” – his term – continued to do poorly.

One of the few exceptions – as noted – was CION.

(Our own review of the BDC’s latest results – and its 1.5% increase in NAVPS – is not as generous but we get the impression investors react initially in a knee-jerk fashion to changes in a few key metrics, and get around to a deeper analysis later).

So we’re in limbo and – probably – awaiting the next macro development for guidance on the way forward.

Our Thoughts

Till then, well add these two cents about the underlying performance of the public BDC sector after three-quarters of the participants have checked in.

First, to enlarge on what we just said above, most BDCs have reported “solid” results, looking at recurring earnings, NAVPS moves and changes in under-performing assets and non-accruals.

Rated

We actually rate every BDC on a 1 to 5 point scale taking those metrics into account where 1 represents out-performance, 2 is performance one would expect, 3 is for modest under-performance, 4 for more serious under-performance and 5 for very poor, unsustainable performance.

As a rule of thumb, any BDC in the bottom 3 categories is “under-performing” compared to what investors have a right to expect performance-wise.

Rating and grouping BDCs by using consistent criteria in this way helps us keep some semblance of order while trying to mind map what’s happening to the sector.

We also like the 5 level rating system because it mirrors the construct most BDCs use themselves to rate their own portfolio companies.

(By the way, CSWC adopted the 5 level system just this quarter).

What We Found

Anyway, out of 36 BDCs that have reported, we rated 25 in the top two categories, and then 5, 1 and 5 in the bottom 3 ratings.

No one quarter’s performance – either good or bad – should not be relied on too heavily as a harbinger of the future but taking all those results together suggests a benign trend, far from the dark forebodings of last April or even of last week.

ROE

That’s encouraging, especially as the bulk of BDCs are still generating double digit “returns on equity” – calculated as recurring earnings divided by net book value. It’s an imperfect measuring device but one that’s universally used by the BDCs themselves.

“And The Money Kept Rollin In”

Likewise, for all the worries about lower dividends ahead, almost every BDC continues to pay out record high amounts.

Using data we’ve collected for BDC Best Ideas, we calculate that three quarters of BDCs will pay out higher distributions in 2025 than in 2022.

We also estimate that total distributions for the 42 BDCs we track at Best Ideas will only fall by (6%) in 2025 versus the level in 2024.

Ergo, investors are getting paid a pretty penny and that may keep prices from coming down too much.

Closing Thought

There’s an argument to be made that even if rates come modestly down in September, BDC prices could yet return to the highs reached in February of this year.

As recently as mid-July, BIZD was only (6%) below the February 27, 2025 highest price.

Stranger things have happened.