BDC COMMON STOCKS

Week 36

Unfazed

We disagree with Wall Street Breakfast’s contention that the markets are much concerned – yet – about a U.S. recession given that two of the 3 major indices are once again up in price and not far off record levels.

Maybe BDC investors are somewhat more concerned given that the only sector exchange tradede fund – ticker BIZD – dropped (0.5%) in 4 days and the S&P BDC Index dropped (0.6%).

However, that might be an acknowledgment that interest rates are coming down shortly – the now unanimous view given the unemployment numbers – which will shave down BDC earnings.

Or, this week’s BDC sector price drop – a relatively modest downdraft by BDC standards – could just be market “noise” and not signify much of anything…

More on that when we review “Where We Are”.

Detailed Metrics

The fact of the matter is that most individual BDC prices did not shift that much this week.

No BDC increased in price by more than 2.5%. A few weeks ago 10 BDCs increased by 3.0% or more.

Down

There were just 3 BDCs whose price dropped (3.0%) or more, as this chart shows:

Stable

We believe BBDC’s (Barings BDC) unusually high price change was related to its just passing the ex-dividend date for its IIIQ 2025 $0.31 distribution.

This is the last quarter in 2025 where the BDC will throw in an extra $0.05 per share special alongside the regular $0.26 dividend.

Three specials have now been paid and nothing new has been announced by management, but you never know with taxable income and the complex rules that have to be followed about pay-outs.

The $0.26 regular dividend seems to be pretty “safe” for the moment, going by what was being said on the most recent conference call.

Looking ahead, we feel confident in the level of our regular dividend. The durability of our portfolio’s net investment income underpinned by a diversified mix of senior secured investments and a well-laddered capital structure gives us conviction in our ability to maintain this level. Our views are further supported by the current shape of the forward… curve which we believe will continue to provide a constructive backdrop for net investment income generation in the near term.

Barings BDC IIQ 2025 Earnings Conference Call

These Things Happen

As to the price drops at CION Investment (CION) and Prospect Capital (PSEC), there was no clear-cut news specific to these two BDCs which would explain their price drops this week.

Both BDCs have under-performed price-wise this year. Half of CION’s (10%) decline in 2025 came about this week.

PSEC – which we’ve written extensively about because its troubles have been greater – only added 10% to its YTD percentage price loss this week.

Elsewhere

The number of BDCs trading at or above book fell to 13 from 14 the week before.

10 BDCs are trading within 10% of their 52 week highs, although no new records were set this week.

11 BDCs are trading within (10%) of their 52 week lows. Again, no new record 52-week lows were set set there either.

Busy, Busy

Despite a relatively quiet week where price movements were concerned, this was a week filled with filings and press releases.

We’ve covered many of them in articles during the week, but were hard pressed to provide comprehensive coverage.

Borrowers Be

The theme of the week where BDC news was fixed income.

All sorts of BDCs big and small are accessing the debt markets for unsecured debt.

Ares Capital (ARCC), Barings BDC (BBDC), Goldman Sachs (GSBD), Great Elm Capital (GECC) and Horizon Technology (HRZN) were all busy in different ways issuing new junior debt.

As we’ve noted, the doors of the debt markets – whether for , institutionally placed unsecured notes or Baby Bonds – are wide open.

Success

GECC – after carefully avoiding committing itself to pre-pay $10mn of the $40mn owed on its 2028 Baby Bond issued a new one a few days later sufficient to:

…redeem all of its outstanding 8.75% notes due 2028 and the remainder of the proceeds may be used (i) to redeem or repurchase all or a portion of its outstanding 5.875% notes due 2026; (ii) to repurchase all or a portion of its outstanding 8.50% notes due 2029; (iii) to repurchase all or a portion of its outstanding 8.125% notes due 2029; (iv) to repay all or a portion of any borrowings outstanding under its revolving credit facility or (v) for general corporate purposes, including making investments consistent with its investment objectives.

GECC Press Release

This “come one, come all” debt market is good news for BDCs everywhere as there is a constant need to refinance junior debt.

Even the most challenged BDCs seem to be able to access capital – although we do have previously mentioned concerns about OFS Capital (OFS).

Good Deals

Moreover, the larger, better known BDCs are able to issue new unsecured notes or arrange Revolvers at very atteactive spreads over Treasuries or SOFR.

Even with loan yields coming in, this means debt-financed BDC loans are generating accretive returns for shareholders in almost all cases.

WHERE WE ARE

Same

As we noted last week, the stock price chart of BIZD and the weekly metrics we gather continue to show that the BDC sector has been treading water since May.

By BDC standards, that’s a long time.

BIZD is down (3.7%) since the end of 2024 and (10.7%) from the February high and before “Liberation Day” stole investors peace of mind, but just about unchanged from its price in Week 20.

Yes, But

The S&P BDC Index on a total return basis – much the better measurement of performance – is in the black and has been since early July.

However, the total return comes to only 1.4% versus 11.2% for the S&P 500, which speaks volumes.

Drilling Down

According to Seeking Alpha, only 13 BDCs amongst the 44 that have been around all year are in the black price-wise in 2025.

However, if we add in distributions the picture is a lot less grim.

According to the data we input into Sharesight, we calculate that 26 of the 44 have generated positive returns this year when you combine price change and dividends.

That’s about a 60/40 positive/negative split.

As this chart shows, 8 BDCs are out-performing even the S&P 500 on a total return basis:

WHERE WE ARE HEADED

September 16-17, 2025

That’s the date of the next Fed meeting and the likely Fed Funds rate cut, and the catalyst for a change in SOFR – the key ingredient in all floating rate loans.

As this SOFR chart reminds us, i) we have taken two steps down from the SOFR peak already, first in September last year and then in December; and ii) we are a very long way from the days of zero interest rates and the 1.0% level the President would like to see.

A (0.25%) decrease will – in and of itself – make very little difference to BDC earnings and the profitability of leveraged borrowers except – maybe – those with debt more than 5x their EBITDA.

Looking Down The Road

What is most critical to BDC earnings in the medium term is what happens after September 16-17, and what the market “believes” is going to happen.

Here is the consensus right now for the Fed Funds rate, which SOFR tends to mirror:

Where We Might Be Headed

We won’t bother you with our opinion on whether the consensus is right or wrong, but will just point out that two years out SOFR remains way above the good old/bad old days of 0.25%-0.50% and the President’s favored rate.

Also, SOFR will have dropped only a little over (20%) from its current level – a (1%) drop.

Damage Assessment

To take one example amongst many, we calculated what would happen on a pro-forma basis to ARCC’s Net Investment Income Per Share (NIIPS) if rates drop (1.0%).

We used the BDC’s own disclosure in the 10-Q and adjusted for the lower Incentive Fee that would follow in an “everything else being equal” scenario.

The bottom line is a (7%) drop in ARCC’s NIIPS.

Caveats A-Plenty

This is not a one-size fits all calculations because the metrics of every BDC differ so much around issues like fixed versus floating portfolio loans; the percentage of the portfolio in income-producing assets; any interest rate “floors” on loans; the mix of fixed and floating rate borrowings on their own balance sheets; the threshold on the Incentive Fee; any “look-back” feature in the compensation arrangement and the percentage of the Incentive Fee charged.

Not A (Big) Problem

All we can say of a broad brush nature is that a (1.0%) decrease in SOFR over the course of a year and a half should not be too onerous for BDC earnings.

On paper that should ensure that BDC earnings don’t return to their zero-interest rate levels of 2021 and are more likely in 2027 to be comparable with what was earned in 2022.

As a matter of curiosity – and by no means is this a projection – we checked the price of BIZD at the end of 2022, which was $14.27.

That’s (12%) down from the current price.

From Our Lips

All of which to say, we don’t expect the lower consensus interest rates over the next year and a half to result in any disastrous consequences for BDC prices.

Most investors have probably penciled in numbers like the ones we’ve discussed for ARCC or BIZD.

Things Could Be Worse

The bigger risks to BDC investors remains a much greater reduction in interest rates or that long awaited sequel to the GFC, which some people are reading into the latest jobs numbers,even with a recent 3.3% increase in the U.S. GDP.

BDC Booster

We don’t want to end, though, on an unnecessarily dramatic note. We’re not click baiting here after all.

Even in either of those Worst Case scenarios (which may combine under certain circumstances), we remain confident about the ability of most BDCs to navigate through without too much in the way of permanent damage to their capital and earnings power.

After all, this was the intention of the legislation that created the BDC class in 1980 and the current crop of BDC managers has built on that in recent years by cautious liability management and maintaining leverage levels well below the maximum allowed limits. Furthermore, BDCs have also emphasized being in a senior position in most of their portfolio loans, which was not the case during the GFC and have also greatly increased diversification.

No wonder the debt markets continue to shovel capital into BDC junior capital and At The Market Programs pump out new shares all the time.

The future is unknowable but the BDC sector is capable of enduring almost any bearish scenario we can think of – and we admit to having a vivid imagination where “worst cases” are concerned.