Blog Post
BDCs trading at 50% discount to NAV, but nonaccruals ticking downward
A few weeks ago, we discussed the erosion of trust in private credit markets and the steep discounts at which publicly traded business development companies now trade. What began as concern over lower dividends — driven by tighter spreads and falling base rates — has broadened into fear of mispriced assets and undisclosed risk pockets. BDCs now trade at nearly a 20% discount to net asset value, with certain large names approaching a 50% discount. Octus has documented four structural contributors to that distrust:
- Sector concentration: Actual software exposure across private credit sits closer to 30% versus the 20% implied by BDC-defined sector classifications. Certain subsectors — health clinic roll-ups and Amazon aggregators — exceed 5% of fair value at individual funds.
- Fair value pricing: In a recent analysis of widely heldstressed loans, Octus identified pricing gaps of nearly 40 points as measured by fair value divided by par.
- Recoveries: Octus analysis of private credit restructurings puts average recoveries at approximately 50 cents on the dollar — well below the 70% previously cited by many managers. High rates of follow-on restructurings are compounding the deterioration of recovery values on original principal.
- Leverage: Investment funds are not required to fully consolidate majority-owned joint venture holdings, which can understate implied leverage and amplify price sensitivity.
Yesterday, we published our analysis of nonaccruals for the fourth quarter reporting period revealing mixed results on improving trust. On an encouraging note, nonaccruals as a percent of total BDC assets ticked lower to just 1.45% of cost as compared with 1.47% as of the third quarter. However, nonaccrual reporting across funds remains inconsistent. Adjusting holdings across the BDC universe for any commonly held loan on nonaccrual status increases nonaccruals as a percent of cost to 2.18%.
Surprisingly, the percent of technology loans on nonaccrual status declined sequentially and fair values of the technology loans on nonaccrual status increased sequentially which is quite the contrast to broadly syndicated loans which have shown significant market deterioration in technology.
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