BDCs At Three Months - An Update

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 An Inner Circle article by 1markb44

Although 2025 is less than a month old I think it’s more useful to gauge performance and estimate future price movements from Election Day in early November, as that’s what has been the big factor.  We’ve seen dramatic moves in the usual suspects like bitcoin and $TSLA, but, perhaps surprisingly, also in some BDC’s.  What usually is a pretty sleepy field has seen some interesting moves.

Remember that pre-election the general feeling was that BDC’s would suffer in the coming lower interest rate environment—lower yields on loans meant the end of double-digit returns for their dividends, forgetting that over time the BDC’s would be able to reset their own loan books lower, so paying less out, and that as long as the spread between BDC’s and Treasuries remained large enough they would still continue to be attractive.  But BDC prices were flat or dropping in general, though BDC’s had done just fine during the previous zero-rate interest environment.  So it looked to me like there might be too much pessimism in general.

Then the election, and expectations turned pretty much on a dime: tariffs, tax cuts, so less revenues, and inflation numbers came in on the hot side of okay and most of the rate cuts got taken off the table in investors’ minds.  That meant the BDC floating rate loans would be able to stay higher for longer, and a lot of BDC’s started climbing.  Three months after the election the situation looks a lot different than it did in early November.

What you see is investors voting strongly for some BDC’s and not for others, though in some cases there are other factors like post-merger lockup expiries happening as pre-IPO shareholders are able to sell post-merger shares for a profit, thus creating a drag on price movement.

Here are some three month numbers for a few of my BDC’s: 

--ARCC:  +11%

--FSK:  +13%

--FDUS:  +17.5% (!)

--GBDC:  +6%

--OBDC:  +3%

So you can see there are winners and losers.  Both GBDC and OBDC have been dragged down by post-merger selling, so I hope/expect both of them to do better going forward.  ARCC has benefited from a flight to quality, and is selling at ATH’s.  FSK has printed a good couple of quarters and the market seems to finally be rewarding that, rightly so, and FDUS...its makeup (loaning to lower middle market and taking equity positions in the companies) is a lot like CSWC, which is well-loved and trades at a good premium, so maybe the market is finally treating FDUS the same?  I don’t know, but I’m not complaining, as it’s gone from trading at or slightly below NAV to a 15% premium.

So, three months in, where am I allocating my BDC money?  Some BDC’s I’ve trimmed: ARCC is at 4 units from 10+; FDUS is at 7 units from 14; FSK is at 12 units, down from 18, and my finger is close to the sell button to trim further.  All of these have done very well in this period.

GBDC and OBDC have lagged, as I said, but I’m holding 10+ units in each in expectation of better performance; I’ll wait and collect the 10% dividends.

New buys:  I’ve used some of the proceeds to start positions in NCDL, KBDC and MSDL.  NCDL and KBDC are new kids on the block post-IPO, the usual situation of private BDC’s going public.  Both pay 10% and have solid books with low NA’s.  NCDL finishes its last lockup expiry this coming week so there shouldn’t be any other artificial drag on price.  MSDL may be the new BXSL, as I’ve written elsewhere—just about 100% first-lien loans, almost no NA’s, big buzz in the comments about it—so there could be a nice price movement if it gets to BXSL-like premium to NAV levels.

One BDC that gets mentioned as an attractive sale-priced candidate is BBDC, which trades at a 12% discount to NAV.  I’ve tried but failed to get excited about it, as it seems overall to be a mediocre BDC, not bad, not great.  I bring it up just since it trades at the biggest discount of any non-troubled BDC.

A word on yields.  At these prices the new normal is 10%, as almost all my BDC’s are at that level now after the runups (ARCC of course lower at 8% since it’s been forever since the last increase).  FSK is down from 15% to 12%, but the rest are all at 10%.  The days of 12-14% are over, at least at these share prices.

The days of big price movements may be behind us, but that means we can get back to collecting dividends, which is the point of holding BDC’s.  I hope this personal overview is useful.

1markb44 has positions in ARCC, OBDC, GBDC, FSK, FSUS. NCDL, MSDL, KBDC.

for Cestrian Capital Research, Inc - 27 January 2025.

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