BDC Weekly Review: The Benefits Of Convertible Bonds For BDCs

Core Viewpoint - The Business Development Company (BDC) sector experienced a strong performance, with a total return of 1.5%, outperforming the broader income market, and sector valuations are near a 5-year peak [5][7]. Market Action - BDCs had a total return of 1.5% during the week, led by high-valuation companies such as MAIN, CSWC, and HTGC, indicating a divergence in sector valuation during market rallies [5]. - The sector valuation has mostly reversed recent declines and is trading close to its 5-year peak [5]. Market Themes - Trinity Capital (TRIN) updated its 2025 convertible bonds' conversion rate, with the conversion price now set at $12.62, allowing bondholders to convert $1,000 principal into 79.2226 shares [6]. - The net income for TRIN has been around $0.55-0.6, suggesting potential for further dividend increases [6]. - Convertible bonds offer management lower coupon payments compared to standard unsecured bonds, and the current market value of $1,000 in bonds is worth $1,113 in common shares due to stock trading premiums [6]. - The issuance of additional common shares may lead to temporary EPS dilution for existing shareholders, but net income remains unchanged, with potential for future EPS growth as new equity is leveraged [6]. Stance and Takeaways - The average BDC is trading at a 9% premium, close to the peak over the last 5 years, indicating expensive valuations [7]. - Underlying loan spreads are tight, with 60% of loans in the public market trading above par [7]. - Despite the overall high valuations in the BDC sector, there are individual BDCs trading at attractive levels, such as Blue Owl Capital Corp III (OBDE), Golub Capital BDC (GBDC), and Barings BDC (BBDC) [8].