BUZZ-KBW says credit concerns intensify, causing BDCs to underperform

October 20 - ** KBW analyst Paul Johnson stated that growing concerns about the credit cycle and economic outlook are leading to weaker performance in the Business Development Company (BDC) sector.

** Since the Federal Reserve raised interest rates last month, the overall performance of BDCs has generally lagged behind the broader market. KBW believes this reflects that the market has priced in more challenges brought by factors such as inflation, rising financing costs, and further downward adjustments in asset values.

** “Notably, the maturity spread for CCC-rated loans has widened to its highest level since 2009, indicating increasing risk for the weakest borrowers and rising tail risk,” Johnson said.

** CCC-rated bonds are the lowest tier in the credit rating system.

** Given their strong and long-term stable performance, KBW favors Ares Capital (ARCC.O), Sixth Street Specialty Lending (TSLX.N), Golub Capital BDC (GBDC.O), and Hercules Capital (HTGC.N).

** BDCs are investment vehicles for investors to obtain ownership of a diversified portfolio of private credit assets.

** As the largest publicly listed BDC, Ares Capital (ARCC.O) will announce its third-quarter financial report on Tuesday, October 27.

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