BeldenNYSE: BDC

Goldman Sachs BDC: Improvements, But Key Risks Remain

Ares Capital is the largest publicly-traded BDC by market cap. ARCC's market leadership is supported by a broader integration into Ares Management's credit platform. Ares Capital's significant scale affords it substantial ability to obtain NAV-accretive deals.

We take a look at the action in business development companies through the third week of June and highlight some of the key themes we are watching. BDCs were flat on the week, with some underperformers due to specific events like lock-up expiry and CFO exit. With valuations at 2021 levels we take a look at the key differences and potential developments.

Logan Ridge Finance Corp. is a BDC focusing on lower middle-market companies, delivering solid earnings growth and increasing dividend payouts for five consecutive quarters. LRFC's portfolio quality is solid, with a decent first-lien exposure and improving balance sheet, but faces credit quality risks due to smaller size and rising non-accruals. Despite their potential, I currently rate LRFC a hold due to credit quality risks. Additionally, I would wait to see growth in net investment income before buying.

We initiate coverage of business development company Bain Capital Specialty Finance, Inc., trading at an 11% dividend yield and a 7% discount to book. Bain Capital Specialty Finance is overweight in Aerospace/Defense and High-Tech sectors, with over 80% in first-lien assets. Bain Capital is focused on the core middle-market segment with a median EBITDA of $44m, part of Bain Capital Credit managing $12bn in assets.

Runway Growth Finance is a VC-focused BDC for which I issued a bull thesis in December 2023. Since then, RWAY has experienced a rather volatile ride and underperformed the BDC market. In this article, I elaborate on RWAY's Q1, 2024 earnings report and justify my decision to recommend avoiding this BDC now.

Since the publication of my bullish article on Main Street Capital, the BDC has outperformed the sector. This is a bit of a surprise to me given that my expectation was that MAIN as a de-risked BDC would lag the index in the environment of a beta-push. However, if we assess the recent quarterly results more deeply, we will quickly recognize that it is only logical that MAIN has outperformed the BDC sector.

We take a look at the action in business development companies through the second week of June and highlight some of the key themes we are watching. BDCs fell 1% on the week, underperforming the broader income space, with valuations coming off slightly. Banks are regaining financing from private credit lenders, challenging the idea of BDCs taking over syndicated lending.

Barings BDC remains an attractive investment with strong fundamentals and performance. They are one of the few high-quality BDCs trading below their NAV with a 20% discount currently. Strong credit quality, NAV growth, and share buybacks make Barings BDC a buy despite risks investing in smaller companies.