Private credit BDCs priced for unrealistic distress
The bull case presented for business development companies (BDCs) is that market pricing implies a default environment far worse than the Great Financial Crisis, creating a highly asymmetric risk-reward profile.
The argument
The guest argued that current market valuations imply 20% default rates with 0% recoveries, whereas the Great Recession only saw 10% defaults and 5% total loss rates. Consequently, investors can acquire these cash-generating credit portfolios at steep discounts to net asset value.
The thesis, stress-tested
✓ What validates it
- ✓Credit loss and default data remaining well below the implied 20% threshold
- ✓Stable net asset value (NAV) marks in upcoming quarterly reports
▸ Risks discussed
- ▸Underwriting quality deterioration during credit cycles
- ▸Aggressive dividend payout structures that may not be sustainable if credit losses spike
Hear it yourself
"So during the great recession, the worst financial crisis we've had since the great depression, faults in this types of in these types of loans were were about 10%, and recoveries were about 5%."
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