Hi YXI friends,

Here is a quick update on Business Development Companies in January. Overall, a high interest rate environment with strong economic growth is an ideal place to be for BDCs. This is because BDCs can benefit from continued high floating rates from the investment companies, while suffering low risks of non-accruals (defaults).

However, a very tight credit spread and a competitive private credit landscape does make lucrative new deals trickier for BDCs. This is because their new investments would earn a lower yield (SOFR + lower spread), while borrowers try to wait for more cuts before taking more loans.

The BDC earnings season starts on the last day of January. It will definitely be interesting to see if the sentiment has changed since the Fed cut 100bp in Q4.

In this note, we also attach the price technical analysis for all of the BDCs we cover.

Table of Contents

• 1. Reporting Dates

• 2. Price Returns 1-Month vs. 3-Month

• 3. Price to NAV Premium/ Discount

• 3. Annualised Dividend Yield On Stock Price

• 4. Technical Analysis

  • ARCC

  • OBDC

  • BXSL

  • FSK

  • MAIN

  • GBDC

  • HTGC

  • TSLX

  • GSBD

  • OCSL

  • NMFC

  • CSWC

  • FDUS

DISCLAIMER: This newsletter is strictly educational. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note's date of publication and are subject to change without notice.

1. Reporting Dates

For those who follow BDC earnings closely, here are the reporting dates of the BDCs in our coverage.

2. Price Returns 1-Month vs. 3-Month

BDCs generally have responded well to the higher bond yields, with many of them outperforming SPY in the past 3 months (unadjusted for dividends), including MAIN, BXSL, ARCC, FSK, and FDUS.

This suggests strong investor confidence in private credit in a high bond yield environment, due to the factors mentioned in our opening section.

MAIN vs SPY since September FOMC

If you compare MAIN with SPY since the September FOMC, MAIN initially moved in line with SPY, but MAIN has led the index ETF by a wide margin after mid-November.

3. Price to NAV Premium/ Discount

MAIN leads the group with the highest price premium to NAV at 90%. For reasons beyond my own comprehension, there seems to be a buzz around the investor community on MAIN as a high quality fund.

HTGC is also trading at a very high premium at +74%. I suspect some of it is to do with the very high yields it generates on high growth early-stage private companies, which allows room for investors’ price chasing.

On the discount side, FSK, GSBD, NMFC, and OCSL are all trading at a discount in the teens. Among them, I personally think FSK has the highest potential to get into the premium territory, due to the strength of KKR’s platform as well as the price technicals.

3. Annualised Dividend Yield On Stock Price

MAIN is now trading at a 5% annualised dividend yield, which is currently just 22bp above the 10-year Treasuries. Not an enticing choice in my opinion.

HTGC with 7.9% yield also appears low, as it focuses on venture-backed companies. I would prefer higher yield to compensate for the sector risk.

ARCC’s 8.6% is below median, but as the largest and one of the oldest BDCs, it is a reliable name that has provided consistent returns in the past 2 decades.

BXSL, GBDC, and OBDC all look appealing given the quality of their portfolios. FSK looks promising, but needs improvements in its NAV and NII performance.

While GSBD and OCSL entertain very high yields (14%+), they both suffered poor investment performances lately. Their price technicals have also been very unappetising.

Please see my previous note comparing everyone’s last quarterly earnings for more detail.

4. Technical Analysis

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