BDC Weekly Review: Market Hates Income Misses

Market Performance - BDCs were down slightly over the week, underperforming the broader income space [2] - BDCs delivered a total return of around 1% in April, a very respectable outcome [3] - BDC valuations are trading not far off their recent peaks, supported by strong earnings and high net income levels [4] Earnings Cycle Observations - Several BDCs experienced net income misses followed by stock price drops despite strong earnings reports and a stable BDC market [5] - FDUS Q1 Non-GAAP EPS of $0.59 missed by$0.01, leading to a post-announcement drop in stock price [5][6] - ARCC posted a slight Q1 earnings miss but saw a rise in NAV and investing activity, initially rallying before falling below pre-announcement levels [7] - GLAD reported NII of $0.25 and total investment income of$24M, missing by $0.15M, resulting in a post-release drop with partial recovery [8] - TSLX Q1 Non-GAAP EPS of$0.52 missed by $0.07, leading to a sizable drop without much recovery [9] NAV and Valuation Dynamics - NAVs of ARCC, GLAD, and TSLX rose over the quarter by 1.5%, 3%, and 0.8% respectively, while FDUS NAV was flat [10] - ARCC sold off 3%, TSLX by 4%, and GLAD by 5.5% in valuation terms, despite the broader sector being essentially flat [10] - Long-term BDC performance is largely a function of NAV, with high-performing BDCs typically showing consistent NAV growth [11] Company-Specific Updates - GLAD reported a slight fall in net income but a 3% rise in NAV due to net unrealized appreciation, with non-accruals rising to 1.8% [13] - GLAD's next dividend doubled due to a stock split, though net income metrics were reported based on the old number of shares [14] - ARCC posted good numbers with a slight decline in net income but a 1.5% rise in NAV, with non-accruals ticking higher to 0.7% [14] - ARCC closed the week at a valuation of around 106%, slightly below the sector average but above the median [15] Market Themes - The earnings cycle has shown a pattern of net income misses leading to stock price drops, potentially influenced by bot trading behavior [11] - Adding BDCs whose price drops on a slight income miss but an NAV gain could be a good contrarian trade for income investors with a longer-term outlook [11]