As mentioned in our previous note, BDCs are like banks, only riskier. Not only are BDCs facing increasing stress due to slowing economic growth and increasing interest rates (i.e. the tradeoff between higher floating rate interest payments received and higher default risk on loans), but some BDCs (such as those focused on venture capital) are dramatically over-exposed to fallout from the Silicon Valley Bank mess. In this note, we share updated data on 40 BDCs, and then dive deeper into 4 specific venture-capital-focused BDCs—and how we expect them to fare in light of the SVB mess—buyer beware!
Tempting 17.4% Yield BDC: 20% Discount to Book, But Know the Risks
The tempting Business Development Company (“BDC”) we review in this report offers a 17.4% dividend yield (the shares are down 38% this year) and it trades at a 20% discount to its book value. However, it faces significant risks including industry-wide BDC headwinds (yes—rising rates help net interest margins, but also increase portfolio-company default risks, especially with the economy heading towards recession) and company-specific challenges (the business strategy is somewhat unique). In this report, we review the business, the risks, the dividend and the valuation, and then conclude with our opinion on investing.