BDC COMMON STOCKS

Week 38

Could Have Been Worse

As we’ll see, this was a rotten week for BDC prices, completely at variance with what happened to the major indices which reached all sorts of record levels.

During the week, though, we seemed to be headed to one of the biggest price drawdowns since we were promised a “Liberation Day” back in April.

Between the close last Friday and most of Wednesday of this week, BIZD – the exchange traded BDC fund – was down (3.0%).

That was a (6%) weekly price drop pace until BDC investors stopped fretting and pushed BIZD back up 2.0% to end at $15.68.

Net-net, BIZD fell (1.1%) – coincidentally the same percentage as the week before.

Worse Than It Seems

However, this metric may not reflect the real damage of the week.

The S&P BDC Index on a price basis dropped (2.7%).

(That’s quite a discrepancy which we checked and double checked).

Furthermore, the individual BDC price movements were relatively radical, especially for out of favor BDCs.

Overall, 13 BDCs increased in price – according to Seeking Alpha – and 33 dropped.

The radical part is that no BDC increased more than 2.2% in price but 15 fell (3.0%) or more.

Need we say that’s a lot?

Worst Of The Week

Here is the list of these above average price under-performers:

Mixed

There are all sorts of BDCs on that list with very different historic performance profiles.

Some better performing BDCs (such as ARCC) are there because they reached their ex-dividend date, which usually causes a temporary price blip.

We are most interested by the heavy representation of BDC underperformers.

Ever Lower

This week 6 BDCs reached new 52 week lows, the highest number since the week ended April 11, 2025.

One of the BDCs involved is also one of the largest and with a famous external manager: FS KKR Capital (FSK).

We wrote an article about the BDC on September 15 shortly FSK fell to a then-record low price of $16.94 and said the following:

Even though the “angst” did ultimately partly dissipate many new lows were set.

FSK ended up with a new 52 week nadir of $15.48, another (1.0%) step down from Monday’s level.

Naming Tickers

Also breaking new 52 price records to the downside (and we’re just going to go by their tickers) were HRZN,MSDL, OXSQ, PSEC and WHF.

If you’re an avid reader of the BDC Reporter you’ll know all these BDCs – and their travails – have featured on these pages for months.

Exception To The Rule

To be fair, MSDL is something of an anomaly as its financial performance has been relatively admirable in the past year.

The BDC’s NAVPS has fallen only (1.2%) in the past 12 months. Compare that to another denizen of this week’s 52 week low list – OXSQ. Its NAVPS has dropped (15.2%). PSEC is down (24.9%); HRZN (26.0%) and WHF (12.1%).

MSDL’s price “problem” seems to be that with all its share “lock-ups”. These have all expired since January and many shareholders seem to have taken the opportunity to sell.

See the BDC’s stock price chart which shows MSDL’s price dropping about (20%) from a peak early in the year:

WHERE WE ARE

Not Good

Three weeks in a row of BDC price losses have left the sector in poor shape on a YTD basis.

BIZD is (12.2%) off its high set in February and (5.7%) from its level at the end of 2024.

Even on a “total return” basis – as calculated by the S&P BDC Index, the sector is in the red in 2025: down (1.1%).

The contrast with the S&P 500 – also on a total return – is jarring. The famous index is up 14.4%.

Details

Getting into the weeds: only 11 BDCs are now trading at or above net book value per share, down from 13 last week.

The lowest we’ve been in 2025 by this popular metric is 10, which occurred for one week in May.

YTD only 10 of the 44 BDCs active in the market all year are up in price.

Only 2 BDCs are trading within 5% of their 52 week high and another 6 in the 5%-10% range.

By contrast, 17 are within 10% of their 52 week low, including 12 within 5%.

Solace

If there is any good news in this snapshot its that 20 of the 46 BDCs we track are in the black on a total return basis.

There are even 6 BDCs that can claim – this week at least – to be out-performing the S&P 500:

WHERE WE ARE HEADED

As Ever

Going by the evidence of the first 38 weeks – and especially the last 3 weeks – you could rightly argue that 2025 is setting up to be a poor year to be broadly invested in this sector of the financial market.

There’s a certain logic involved.

After all, the days of peak BDC earnings are now 2 years away.

Those Were The Days

Going by the recurring annual earnings of every BDC we have assembled in the BDC Performance Table for our sister publication – BDC Best Ideas – we can see that the “Best Of Times” was in 2023.

Naturally enough, that’s when interest rates were at their highest.

In 2024, earnings dropped (8.5%) from the 2023 level.

If you believe the 2025 analyst earnings consensus this year will see a further (14.5%) drop.

In 2026, there’s another (4.7%) to go.

However, that last estimate estimate seems on the low side if you believe the more extreme predictions for rate cuts.

What Really Matters

Thankfully, BDC dividends are not falling as fast as earnings.

This is partly due to the foresight of many BDC managers, storing away excess earnings during the “fat days” of 2023 and 2024 for distribution this year and next.

Then there are the under-appreciated occasional boosts to “distributable income” from realized gains.

A whole array of BDCs have managed to boost their payouts in this way, including Main Street Capital (MAIN); Gladstone Investment (GAIN); Capital Southwest (CSWC) and Ares Capital ARCC) – to name only a few.

Not So Long Ago

By our numbers, the year for peak BDC payouts was last year – one year after earnings reached their apex.

It’s too early to tell with any confidence how 2025 will fare but we annualized BDC dividends paid to date in 2025 and found that the aggregate pro-forma payout is only (7.9%) behind the record 2024 level.

This single digit percentage decrease in BDC payouts may go a long way to explain why BDC prices have not dropped as much as they could have.

Has To Be Said

If that is the case, the bad news looking forward is that BDC dividends are likely to be less “sticky” in 2026 and 2027.

One could make a case that BDC prices could continue to drop in fits and starts at least until we reach a bottom where Fed rate cuts are concerned.

The Fed’s “dot plot” projections show interest rates gradually declining over the next several years before stabilizing:

• End of 2025: 3.6% (median projection)
• End of 2026: 3.4% (median projection)
• End of 2027: 3.1% (median projection)
• End of 2028: 3.1% (median projection)
• Longer run: 3.0% (median projection)

The projections indicate that rates are expected to level out around 2027-2028, reaching the Fed’s estimated neutral rate of 3.0% in the longer run.

Most of the expected rate decline will have occurred by 2027 and by then earnings and regular distributions will be roughly in line.

Will that be the “bottom” for BDC prices?

Deja Vu?

We’ve had long periods of ever lower BDC prices before.

With our elephantine memory, we remember how ARCC reached a peak price in February 2013 and did not exceed that level till January 2020…

(Unfortunately, neither the BIZD data nor the S&P BDC Index go back far enough in time to demonstrate how the sector performed but the numbers are similar).

Caveat

This is not a prediction. It’s just another possible scenario amongst the many we discuss on these pages.

The future is unknowable but there’s no harm in a little guessing.

Half Full

We take some comfort – on behalf of BDC investors – in that the consensus “neutral rate” for the Fed is said to be 3.0%.

That’s way higher than what BDCs had to contend with in the “zero interest rate” years of 2020-2022.

In fact, as this chart shows, rates may still end up at a level higher than they’ve been since the Great Recession.

If so, that should go a long way to keep BDC earnings and Return On Equity (ROE) relatively elevated in a historical context and justify the unbounded confidence the markets have been showing for Private Credit across the board.

What BDC investors may lose at the price level they could make back with above average profits and distributions for those taking the long view.