Key Takeaways
- • The Van Eck BDC Income ETF touched a 52-week low of $11.90 on Wednesday, down more than 10% over five weeks, then rose 1% to $12.17 on Thursday with a trailing one-year dividend yield of 13%, according to Barron's.
- • Several smaller business development companies trade at discounts of 35% or more to second-quarter net asset value, and some yield 15% or more, according to Raymond James data cited in the article.
- • Julian Klymochko, CEO and CIO at Accelerate, says the headline risks facing private credit have lessened, though private BDC redemptions remain elevated and Blackstone Private Credit Fund (Bcred) has capped quarterly redemptions at 5% of NAV.
- • BDC loans typically float at spreads of five to six percentage points over SOFR, now close to 4%, which supports yields, while BDC financing costs are rising.
Summary
Business development companies (BDCs) that invest in private credit have hit new 52-week lows even though the sector's worst losses and redemption pressure came earlier this year. The Van Eck BDC Income ETF, which holds stakes in several of the largest private-credit BDCs, touched $11.90 on Wednesday and rebounded to $12.17 on Thursday, helped by strength in the bond market. Barron's reports that the fund's trailing one-year dividend yield stands at 13%.
BDCs such as Ares Capital, Blackstone Secured Lending and Blue Owl Capital Corp. make loans, often yielding about 10%, to smaller, below-investment-grade private companies, and use leverage to pay substantial dividends. Some deeply discounted BDCs now yield 15% or more. Per Raymond James data, Blue Owl Technology Finance, FS KKR Capital, New Mountain Finance and Midcap Financial Investment trade at discounts of 35% or more to second-quarter NAV. Julian Klymochko of Accelerate notes that the largest and best-known BDCs, including Ares Capital and Blackstone Secured Lending, have held up relatively well and trade close to NAV, while many smaller vehicles have been hit harder.
The article traces the sector's stress to earlier this year, when credit blowups, including software company Medallia, prompted outflows from private, non-traded BDCs that forced them to cap redemptions. Concern about AI disrupting software borrowers compounded the pressure. Klymochko says the situation has improved: private BDC redemptions remain high but have not worsened meaningfully, and software stocks have risen almost 50% on average from April lows. Barron's links the recent BDC selloff in part to weakness in financial stocks, with many leading bank shares down 15% or more from their midyear highs.
Higher short rates are favorable for BDC income because their loans float above SOFR, but financing costs are moving higher as well. The article also flags a potential arbitrage: wealth managers and clients holding private BDCs, which trade at NAV, could sell and buy similar public BDCs, often run by the same managers, at a discount. Barron's reports little evidence of this happening, which it attributes partly to limited sophistication among some wealth managers and advisors' loyalty to fund managers. Continued wide discounts on public BDCs could, however, sustain high redemption requests at large private vehicles such as Bcred.
BDCs such as Ares Capital, Blackstone Secured Lending and Blue Owl Capital Corp. make loans, often yielding about 10%, to smaller, below-investment-grade private companies, and use leverage to pay substantial dividends. Some deeply discounted BDCs now yield 15% or more. Per Raymond James data, Blue Owl Technology Finance, FS KKR Capital, New Mountain Finance and Midcap Financial Investment trade at discounts of 35% or more to second-quarter NAV. Julian Klymochko of Accelerate notes that the largest and best-known BDCs, including Ares Capital and Blackstone Secured Lending, have held up relatively well and trade close to NAV, while many smaller vehicles have been hit harder.
The article traces the sector's stress to earlier this year, when credit blowups, including software company Medallia, prompted outflows from private, non-traded BDCs that forced them to cap redemptions. Concern about AI disrupting software borrowers compounded the pressure. Klymochko says the situation has improved: private BDC redemptions remain high but have not worsened meaningfully, and software stocks have risen almost 50% on average from April lows. Barron's links the recent BDC selloff in part to weakness in financial stocks, with many leading bank shares down 15% or more from their midyear highs.
Higher short rates are favorable for BDC income because their loans float above SOFR, but financing costs are moving higher as well. The article also flags a potential arbitrage: wealth managers and clients holding private BDCs, which trade at NAV, could sell and buy similar public BDCs, often run by the same managers, at a discount. Barron's reports little evidence of this happening, which it attributes partly to limited sophistication among some wealth managers and advisors' loyalty to fund managers. Continued wide discounts on public BDCs could, however, sustain high redemption requests at large private vehicles such as Bcred.
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