Broadening credit concerns driving BDC weakness, KBW says
XLF•KBW analyst Paul Johnson says evolving concerns about the credit cycle and economic outlook are driving weakness in business development companies, which have largely underperformed broader markets since last month’s Fed rate hike.
1. Credit risks rise
KBW says markets are pricing in more challenges from inflation, costlier financing and further asset-value markdowns. Johnson said spreads to maturity for CCC-rated loans widened to their highest levels since 2009, indicating heightened risk among the weakest borrowers and increasing tail risk.
2. KBW’s preferred BDCs
KBW favors Ares Capital, Sixth Street Specialty Lending, Golub Capital BDC and Hercules Capital, citing their strong, long-term consistent performance. Ares Capital, the largest publicly traded BDC, is set to report third-quarter results on October 27.
