BDC COMMON STOCKS

Week 37

You Go Your Way

Once again the major indices have moved up in price – apparently on the ever greater certainty that interest rates will be coming down.

That very certainty may account for the corresponding drop in BDC sector prices.

BIZD – the Van Eck sponsored BDC exchange traded fund – fell (1.1%) and the S&P BDC Index was down (1.0%), both on a price and total return basis.

36 BDCs were down in price – the most in 6 weeks by that metric – and only 10 were up or flat.

Downbeat

No BDC increased by more than 1.9% in price this week, but 9 were down by (3.0%) or more.

Here is a list- drawn from Seeking Alpha of the (3%) plus BDC performers:

Par For The Course

In most cases, there was no news development to explain these above average downward price moves.

This is what markets consist of: constant movement as investors position and re-position themselves for an unknowable future.

Tops

However, we do know why Gladstone Capital (GLAD) ended up losing a tenth of its market capitalization, which we discussed during the week.

Management took advantage of the BDC’s strong stock price and its need to refinance an unsecured note in January 2026 to launch a convertible note, which will mature in 2030.

That’s prudent liability management but was not popular with existing shareholders worried about dilution.

Let Us Count The Ways

There is more than one way GLAD could have chosen to skin this cat.

Management sought to keep its borrowing costs down with a yield on the convertible of just 5.875%, rather than paying 2%-2.5% more by issuing a new Baby Bond or Cumulative Redeemable Preferred. The latter can be hard to place and can result in the holders receiving Board seats if a default occurs and is not cured.

On paper, GLAD had enough availability to refinance the 2026 unsecured note with its Revolver but that would have diminished the BDC’s liquidity and still cost around 7.0% per annum.

GLAD has to keep its powder dry for further note refinancings due in 2027 and 2028.

The latter one – a Baby Bond with a yield of 7.75% can be redeemed at any time and with rates dropping GLAD might be able to reduce its borrowing cost before long, either by a draw on the Revolver or issuing a better priced new unsecured note.

Standing Tall

Anyway, investors were not delighted and knocked GLAD’s price down considerably.

Management, though, must take some comfort that its price still trades at an 11% premium to book and well off its 52 week low, albeit (23%) off the 52 week high.

WHERE WE ARE

Stable

The BDC sector – this week’s downdraft notwithstanding – has remained in a narrow price range since the beginning of August.

BIZD at the end of Week 31 (August 1) was priced at $15.97. Six weeks later – at Week 37 – the ETF is only (0.8%) lower – the sort of difference that can be made back in less than a day’s trading.

Not So Great

YTD, BIZD, though, is (4.7%) down in price and (11.3%) below the February 2025 52 week high.

Even when we turn to the S&P BDC Index calculated on a total return basis, the sector is barely in the black this year: 0.4%.

According to Seeking Alpha, only 12 of the 44 BDCs that have traded all year are in positive price territory.

Not So Bad

The only consolation we have to offer is the data from the 2025 YTD total return calculation for each BDC that we’ve collected using Sharesight.

22 BDCs are in the black by this metric, including 5 performing better than the outstanding total return of the S&P 500, which is up 13.0%.

To be fair and balanced, we also note that 8 BDCs – even when dividends are taken into account – are down by a double digit percentage.

Wooden Spoon

The worst performer – and this won’t come as a surprise to any regular reader – is Prospect Capital (PSEC) bwhich has lost more than a quarter of its value.

Four More Years

We like to say that losing money investing in BDCs is very hard to do but that requires hanging in there for the long run.

Over a 5 year time frame, only two BDCs are in the red on a total return – and barely so.

(One of them is PSEC).

Truism Of The Week

In the short-ish run, investing in BDCs can be painful if one backs the wrong horses.

WHERE WE ARE HEADED

On The Cusp

After 9 months of stasis, we appear to be on the verge of a change in the rate environment.

Rarely has there been such unanimity that the Fed is going to cut rates.

A (0.25%) reduction is universally anticipated.

All Things Considered

Now let’s discuss what is less clear.

The Fed – like they did last year at this point much to the surprise of this oft humbled observer – might cut rates by (0.5%).

That is expected by only by 5%-12% of market participants.

Investors would probably “read” such a move as evidence that the Fed is more concerned about the state of the economy than previously thought.

The combination of the bigger impact on BDC earnings and the elevated angst about the way forward for the economy could trigger a big drop in BDC prices.

Our Favorite Scenario

Or, the Fed could cut rates by (0.25%) but be much more evasive about whether we should expect 2 more cuts this year and more in 2026.

Unstoppable

We concede, though, that even if Chairman Powell stiffens his resolve to keep rates on the high side – and finds allies on the committee – there are so many hands up in the financial community to take his place in May 2026 that all we might get is a slight delay in the inevitable.

Tea Leaf Reading

That will take some time to play out but we might get an idea of how this debate between “doves” and “hawks” is headed after the Fed meeting.

Never Say Never

There are medium term scenarios that could be favorable for the BDC sector – mostly which revolve around rates staying higher for longer and the economy continuing to expand.

However, we have to admit that most of the likely outcomes out there in the zeitgeist cluster around material decreases in interest rates in 2025-2026 and a weaker economy and a pick-up in credit losses.

Square Jawed

We should say, though, that BDC investors have kept calm and carried on ever since the fuss surrounding “Liberation Day”.

The BDC market may need something coming out of left field to a trigger major downward – or upward – price move.

Barring that, BDC prices may continue in their current band.

Living In Interesting Times

Let’s reconvene next week and see how this played out.