2 BDCs That Improved And 2 That Got Worse After Q2 Earnings

Core Viewpoint - The BDC market is experiencing heightened volatility due to increased corporate distress and the Federal Reserve's approach to interest rate cuts, which complicates the ability of BDCs to maintain attractive spreads [1][2] BDC Market Dynamics - The anticipated interest rate cuts have not yet led to significant corrections in the BDC sector, but future adjustments are expected as the effects of these cuts permeate through BDC structures [2] - There are early signs of weakening portfolio quality metrics among BDCs, making a focus on quality increasingly critical [2] Stronger BDCs - Carlyle Secured Lending Inc. (CGBD): - Maintained strong total investment income and a high dividend coverage ratio of 128% despite a 25% increase in dividends since early 2022 [4] - Net investment income per share remained stable at $0.51, with a minor non-accrual base of 1.8% expected to decline to 1% in Q3 2024 [4] - Announced a merger with Carlyle Secured Lending III, which is expected to benefit shareholders [4] - FS KKR Capital (FSK): - Total investment income increased by $5 million, with a decrease in interest expenses and management fees, resulting in a $0.02 per share increase [5] - EBITDA levels of underlying portfolio investments grew by approximately 12% year-over-year, with non-accruals declining to 1.8% of total portfolio fair value [5] - FSK trades at a ~17% discount to NAV, with leverage decreasing to 1.09x, below the sector average [5] Weaker BDCs - Oaktree Specialty Lending (OCSL): - Experienced a negative total return of 15% since January 2024, with adjusted net investment income declining to $0.55 per share [6] - Non-accruals increased from 4.3% to 5.7% of the portfolio, leading to a distribution coverage of only 100% [6] - Leverage increased from 1.02x to 1.1x, indicating potential risks despite solid portfolio statistics [6] - Horizon Technology Finance (HRZN): - Investment income decreased from $28 million to $26 million, with per share income dropping from $0.54 to $0.36 year-over-year [7] - The portfolio size has declined due to shallow M&A activity, with repayments exceeding new investments [7] - Debt to equity ratio remains high at 1.36x, indicating balance sheet concerns [7] Conclusion - The BDC market is facing challenges from rising non-accruals, shallow transaction activity, and impending interest rate cuts, necessitating a focus on high-quality and defensive BDCs to sustain distributions and support gradual growth [8]