Publicly traded BDCs are currently undervalued
The guest argued that high-quality publicly traded Business Development Companies (BDCs) are undervalued due to an extreme market overreaction to private credit concerns.
The argument
The market has priced in implied default rates of 50% to 70% for private credit assets, which the guest argues is highly unrealistic. Even in severe recessions, default rates historically peak around 6% to 10%, and senior secured loans typically recover 60% to 70% of principal during workouts.
The thesis, stress-tested
✓ What validates it
- ✓Stabilization or decrease in non-accruals and defaults in upcoming BDC quarterly reports
- ✓BDC stock prices closing the discount to net asset value (NAV)
▸ Risks discussed
- ▸Actual default rates could exceed historical recession levels in a severe downturn
- ▸Illiquidity of underlying private credit assets can trigger fund gates or redemption limits
- ▸Potential dividend cuts if underlying portfolio companies fail to service their debt
Hear it yourself
"to get to the punchline, Steven, it sounds like you believe that, publicly traded BDC that that high quality publicly traded BDC funds, are undervalued right now. Yeah. Mhmm. For the most part. Especially if you see individual ones that have big discounts are I think are definitely undervalued."
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