By Bill Alpert
Over the past week, many of the lending funds known as business development companies reported earnings. Investors saw no good news.
That doesn't mean the news is actually bad -- it's just how investors see BDCs these days. The median BDC stock trades at 78% of its portfolio's net asset value -- or NAV -- as every report of a troubled loan somewhere gets generalized by investors into a systemic threat.
This week, alarms rang over FS KKR Capital Corp., a midsize BDC that's jointly run by KKR & Co. and the Philadelphia-based firm Future Standard. Its shares fell nearly 20%, to less than 60% of its NAV, after it cut its dividend and reported a rise in bad loans during December's quarter.
FS KKR chopped its quarterly dividend to 48 cents a share, from 70 cents. Lower dividends have been expected across the BDC industry, because funds make floating rate loans and base interest rates are falling -- to the great relief of everyone else in our economy.
But the number of troubled loans in FS KKR's portfolio is higher than at other BDCs. Fourteen loans are on nonaccrual -- that is, they're not collecting interest -- and they represent 3.4% of the portfolio, up from 2.9% in September.
New to the nonaccrual list in December were loans to the networks of veterinarians and dentists, at Amerivet Partners Management and Dental Care Alliance. The BDC also marked down its loan to the software firm Medallia, a borrower that's been a headache for many lenders.
Also cutting its dividend was MidCap Financial Investment Corp., a smaller BDC managed by Apollo Global Management. The quarterly payout dropped to 31 cents a share, from 38 cents, and investors knocked over 12% off the stock price.
Shifting interest rates were part of the reason for the dividend cut. There were income-related reasons, too, including nonaccrual status for the scooter rental firm Bird Rides, and restructuring losses from the consumer lender LendingPoint.
As a percent of its portfolio, however, non-accruals at MidCap Financial actually improved -- declining to 2.6%, from 3.1% in September. With its stock trading at less than 75% of its NAV, the BDC also said it would buy back $100 million worth of stock, while that discount persists.
Raymond James analyst Robert Dodd likes MidCap Financial, rating it a Buy and thinking that its stock can rise from $9.65 today, to $13.50.
A prominent example of how traders are reading the worst into any BDC news was the reaction last week when Blue Owl Capital announced a liquidity solution for the investors in its nontraded BDC, called Blue Owl Capital Corp II.
Nontraded BDCs have become migraines for private credit firms, since publicly traded BDCs went to such deep discounts. As my colleague Andrew Bary has pointed out, nontraded BDCs will return cash to investors at the funds' NAV, which an investor can use to buy public BDCs trading at deep discounts to NAV. The equity-weighted average public BDC now trades at 84% of its NAV compared with a five-year average of 98%.
Blue Owl had wanted to merge the nontraded Blue Owl Capital Corp II into its similar publicly traded fund Blue Owl Capital Corp. But the current discount disparity made that infeasible. So last week, the fund manager reported that it had sold $1.4 billion worth of loans, to raise enough cash to cash out a third of the nontraded fund's investors, pro rata. It plans to continue letting investors cash out of the fund.
But headlines reported the maneuver as another sign of trouble -- with some mistakenly reporting that the firm was halting regular redemptions from the fund. Some waggish hedge fund managers offered to buy out investors at Blue Owl funds, at a deep discount. Blue Owl stock sank.
But as noted by the firm's managers, and analysts like Dodd, Blue Owl sold the loans for 99.7% of their carrying value -- validating their quality and fairness of accounting for the portfolio. The cash will provide an exit for investors in the small, nontraded BDC, which was never intended as a permanent investment vehicle.
"This fund has significant earnings," Blue Owl co-CEO Craig Packer said on a conference call. "Our intention is to continue to return capital on an accelerated basis."
Dodd, for his part, recommends the deeply-discounted shares of the BDC Blue Owl Capital and those of its manager Blue Owl Capital.
The BDC selloff has lifted the industry's average expected dividend yield to 13.2%, notes Dodd, compared with a five-year average of 10.6%. And in general, BDC loans are performing well.
For the funds that have reported this year, Dodd calculates that the nonaccrual rate is down slightly, to 1.6%. First-time loan defaults dropped to 1.3% and show no sign of deterioration.
"We aren't currently seeing signs or indicators of any near-term significant or broad-based credit deterioration," wrote the Raymond James analyst this week.
With the BDCs held in such low regard, now is a good time to get into the business, in the view of Dan Loeb, who runs the hedge fund firm Third Point. At a Miami Beach alternative investment conference on Tuesday. Loeb said he'll launch a BDC in April.
Write to Bill Alpert at william.alpert@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
February 27, 2026 17:32 ET (22:32 GMT)
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