Catastrophic

BDC COMMON STOCKS

Week 41

We Have No Words

If a (2.7%) drop in the Dow Jones Index is equated to “cratering” – see above – then what do you call a (6.3%) fall in BIZD – the only BDC sector exchange traded fund?

We leave that to our readers.

However, there is no doubt that Week 41 of 2025 was one of the worst all year where BDC prices are concerned.

Besides BIZD, the S&P BDC Index on a price only basis dropped (5.9%) and (5.8%) on a total return basis.

Almost Everyone

Of the 46 public BDCs we track, 44 dropped in price.

Of the BDCs in the red, 38 fell by (3.0%) or more.

Of those 4 saw a decline greater than (10%):

Branded

Great Elm Capital’s (GECC) disastrous price performance makes sense.

Investors are well aware that the idiosyncratic BDC – which has its fingers in many segments of the leveraged loan market – has substantial exposure to the credit disaster of the year: First Brands.

As we discussed in last week’s recap, in late September an analyst that covers the stock downgraded GECC to a “Neutral” rating and a target price of $11.0 a share.

Investors did not stay calm and carry on but have been panic selling ever since.

This week, GECC – as the chart shows – closed at $7.69, but was as low as $7.31 on Thursday intra-day.

Measuring

Before the news broke GECC was trading at $11.45 a share – buoyed by higher than usual earnings and distributions.

From highest to lowest, the stock has fallen (36%).

Damage Control

Management has sought to stop the bleeding by issuing a press release to “address investors questions” regarding their direct and indirect exposure to First Brands.

Cutting to the chase, GECC calculates that the aggregate loss per share on a NAV basis will be as much as ($1.50) per share.

As of the IIQ 2025, GECC’s NAVPS was $12.10, implying a book value loss of (12.0%), but that includes CLO investments held in an off balance sheet joint venture.

Income is projected to fall by ($0.18) per share from interest forgone on the first and second lien loans on GECC’s books.

(No estimate was given for CLO income but First Brands represents 0.9% of all the BDC’s CLO investments owned so the impact should be modest).

Fair Enough?

The first and second lien loans to First Brands amount to just over $25mn at cost, or 6% of the entire portfolio.

Miraculously GECC found a buyer for $4.4mn of the first lien debt some time during the IIIQ 2015 so the final loss – according to the BDC Credit Reporter which has been writing about this subject since late September – is likely to be ($21mn) in a worst case scenario.

That amounts to ($1.50) a share going by the most recent share total, given that GECC had been issuing new shares before this development occurred.

Uh-Oh

Investors are now asking themselves: have we over-reacted?

On Friday, the stock moved up 3.2% (although GECC remained the worst BDC performer for the week).

We’ll be tackling that thorny question in yet another of our publications: BDC Best Ideas.

After all, markets are famous for over-shooting both upwards and downwards.

Is the current valuation of GECC a sober and appropriate reflection of the facts on the ground as we know them?

Birds Of A Feather

The 3 other BDCs down more than (10%) this week were Saratoga Investment (SAR); Capital Southwest (CSWC) and Main Street Capital (MAIN), as we showed above.

SAR’s “crime” seems to have been reporting quarterly results through August 2025 that were not sufficiently robust for many investors, especially as the current distribution level is well above SAR’s recurring income.

Ignored – for the moment – is a portfolio almost devoid of both non-accruals and otherwise under-performing investments; an increase in the BDC’s NAVPS, and $200mn in cash liquidity – which is a great deal for a lower middle market player with less than a billion dollar portfolio.

Or, maybe investors were dismayed to hear about the highly competitive environment for new deals – which should be a surprise to no one.

Nonetheless, SAR did manage to book new deals in the period and there is more likely in the pipeline.

Management made all the right noises about the BDC’s longer term outlook:

The relationships and overall presence we’ve built in the marketplace, combined with our ramped-up business development initiatives, give us confidence in our ability to achieve healthy portfolio growth in a manner that we expect to be accretive to our shareholders in the long run.

Even management’s confidence in maintaining its $3.00 a year annual payout was insufficient to reassure some investors.

As of Friday, SAR’s yield amounted to 13.9%.

Commonality

Neither MAIN nor CSWC announced their results this week but both operate in the lower middle market as well.

Their unusually high price drops might be seen as investor concern about what might happen to smaller companies in our uncertain world.

Price Of Success?

Another theory is that the stock prices of all three BDCs are being impacted by profit taking.

MAIN – to use the example of the most popular BDC of all – has fallen (18%) in price of late.

This sort of retreat has happened before – but it’s a relatively rare phenomenon.

We wonder if all those investors who perennially complain that MAIN is over-valued and claim to be waiting for the right opportunity to buy will do just that.

WHERE WE ARE

In A Word

Miserable.

That must be the way anyone long BDC common stocks must feel.

We’ll let the numbers tell the story:

BIZD is down (18.9%) in 2025 YTD and (24.5%) from its peak in February.

Arguably, these are “Bear Market” numbers.

No individual BDC is up in price all year at this point.

Only 6 BDCs are trading at or above their book value versus 14 just before this 6 week price slide began.

No BDC is trading even 10% close to its 52 week high while 27 are within 5% of their 52 week low and another 7 5%-10% out.

We can’t even take much comfort from BDC total returns.

The S&P BDC Index calculated in that way is still down (11.5%).

As this chart below shows – drawn from Sharesight – only 7 public BDCs are in the black YTD:

There’s no way around the matter: if 2025 ended on Friday, very few BDC investors would be happy, regardless of which stocks they had chosen.

Some of the individual total return losses are truly catastrophic if just measured over these past 41 weeks.

We count 9 BDCs – a fifth of the total – in the red by more than (20%) and 25 greater than (10%).

WHERE WE ARE HEADED

The Problem

What makes this latest BDC price implosion a little tricky is that its not related to a perceived geopolitical or economic extraneous risk – such as Covid (2020), or a looming recession (2022) or shifts in the global trade system (2025).

Instead, investors are ABSOLUTELY CERTAIN that interest rates are coming down – and in a big way – in the quarters ahead.

Therefore, BDC income, earnings and – ultimately – distributions will be coming down – and in a big way.

Thus, BDC stocks are going to be less valuable to own and that’s before any consideration of other risks such as a potential pick-up in credit losses; even thinner spreads due to an abundance of capital and a shortage of investment opportunities and the running off of cheap medium term unsecured debt issued in the ZIRP era which will need to be replaced with higher cost borrowings.

However, nobody really knows how many rate cuts there are ahead of us and even the analysts with the most sophisticated models cannot really tell us what each BDC will be earning in 2026 and 2027.

From prior experience, we believe that a great part of the price declines of recent days can be attributed to some BDC investors just getting out of the way to see where all this goes before jumping back in.

How Low Can You Go?

We may regret writing this in weeks to come, but a look at the lifetime chart of BIZD suggests the price meltdown of the last 6 weeks has gone too far.

As of Friday – and if we ignore the very specific and quickly resolved Covid crisis of 2020 – BIZD is trading at an all-time low.

BIZD is trading below its price level in every year in its history.

Yet , as we show below interest rates – as measured by LIBOR and SOFR – were much lower before 2022 and at levels even the Trump Administration is not expecting going forward:

IMHO

Furthermore, we’d argue that BDC balance sheets, portfolio credit risk profile and liquidity are superior now to the situation in prior years.

Painting with a broad brush, BDCs have a greater proportion of covenant-lite junior debt financing their investments; a higher proportion of first lien loans in their portfolios and greater diversification by borrower, sector and geography; loads of unused borrowing capacity from banks and the SBIC and ready access to the institutional and Baby Bond markets.

Importantly, many BDCs have very low levels of non-performing loans at a time when many other private credit lenders with less experience and weaker “platforms” are stubbing their toes all over the place, as reflected in the $11bn First Brands fiasco.

Not So Bad

Which is not to say that there are not a sizable minority of public BDCs that have not performed as well as one might have expected.

However, even the “worst of the worst” – about a fifth if the public BDC universe – continue to operate “normally”, without defaulting on their own debt and continuing to pay decent distributions in many cases.

From a historical perspective – while conceding that every crisis is different – the current BDC price slide has gone too far, especially for the majority of BDCs that are performing well where fundamentals are concerned.

A Final Thought

No offense intended but investors sometimes get a pack mentality and are blind to alternative scenarios.

Right now, there is a white hot certainty – regardless of what happens in the economy – that interest rates are going to come inexorably down.

However, look a bit further out and assume the Fed keeps a scintilla of independence, one could make a strong case for interest rates flattening out shortly. Or even rising.

We won’t go through all the arguments because we all know what they are and every other day a Fed Governor reminds us that inflation is far from tamed and letting it roam wild will be much more injurious to the country than anything else.

Closing one’s eyes to the problem, as we seem to be doing, only ensures a more vigorous rate hiking will be necessary down the road.