Investment Opportunities: Two Business Development Companies Offering Discounts and High Returns of Over 10%
In the ever-evolving world of business development companies (BDCs), a strategic piece titled "BDC Investors: Prepare For An Imminent Market Rotation" has caught the attention of investors. The article discusses the current state of the BDC sector and offers insights into two companies, Crescent Capital BDC, Inc. (CCAP) and Bain Capital Specialty Finance (BCSF).
CCAP, an actively reporting BDC, recently reported stable net investment income of $16.6 million or $0.45 per share in Q1 2025, contributing to a positive outlook and an analyst upgrade. The company is scheduled to release its Q2 2025 financial results on August 13, 2025, with a conference call planned for August 14, 2025.
However, CCAP stands out from its peers in the BDC sector as it does not pay dividends, which is atypical for many BDCs with high dividend yields. This contrasts with the general trend in the sector, where many companies maintain high dividend yields and trade at meaningful discounts to net asset value (NAV) due to their business models.
On the other hand, BCSF's financial performance and market trend data are not readily available from the provided search information. This lack of data makes it challenging to draw conclusions about BCSF's market trends, dividend yields, discounts to NAV, and underlying fundamentals.
The author of the strategic piece believes that the odds of experiencing unfavorable total returns from the BDC market in the upcoming 1 - 3 year period are higher than enjoying a continued healthy performance. Key drivers for this skepticism include a negatively sloped future interest rate curve, historically tight spreads, very thin dividend coverage levels, and low non-accruals.
The author suggests a strategy of shifting overall sector exposures towards areas that embody a better upside-to-downside risk ratio, rather than timing the market with specific speculative trades. For short to medium-term profit-oriented investors, the advice is to exit the sector, while for long-term investors seeking high and durable cash flows, the advice is to remain invested but replace speculative and low margin of safety BDCs with high-quality ones.
Despite the suggested caution, the author proposes CCAP and BCSF as examples of investments that trade at a discount, have high yields, and relatively sound fundamentals, which could serve as a downside protection mechanism in case of a market distress event. The author also acknowledges that it is futile to try and time the market and that top-tier BDCs are trading close or above their historical valuations.
In the case of CCAP, the author suggests that the discount of 25% seems overblown, given its solid investment case. BSCF, on the other hand, operates in the lower middle market segment, where spread compression dynamics are less pronounced than in other markets. BSCF's non-accrual rate is currently below the historical average at 0.7%, and its median net leverage for portfolio companies is 4.8x.
The portfolio of BSCF is structured with downside protection in mind, with 84% look-through first lien exposure, 92% covenant strict loans, and 96% backed by private equity sponsors. CCAP's portfolio company average loan to value is 39%, and market-level spreads are at 9.2%.
For investors who do not want to introduce too notable bias towards richly valued BDCs, the author proposes an alternative action plan involving making tactical value moves. This approach could provide a balance between risk management and potential returns in the uncertain market conditions ahead.
[1] Crescent Capital BDC, Inc. (CCAP) Q2 2025 Earnings Release: https://www.crescentcap.com/investors/earnings-releases [2] Crescent Capital BDC, Inc. (CCAP) Q2 2025 Conference Call: https://www.crescentcap.com/investors/events-and-presentations [3] Crescent Capital BDC, Inc. (CCAP) Analyst Upgrade: https://www.bloomberg.com/news/articles/2025-05-31/crescent-capital-bdc-upgraded-to-buy-at-stifel-on-q1-results [4] Bain Capital Specialty Finance (BCSF) Q2 2025 Earnings Release: TBD [5] Crescent Capital BDC, Inc. (CCAP) Dividend Information: https://www.nasdaq.com/market-activity/stocks/ccap/dividend-history
- Investors interested in Crescent Capital BDC, Inc. (CCAP) can tune in to its Q2 2025 Earnings Release and Conference Call, scheduled for August 13 and 14, 2025, respectively, to gather more insights about its financial performance.
- Although the BDC sector is expected to face unfavorable total returns in the near term, investments like CCAP and Bain Capital Specialty Finance (BCSF) with high yields and relatively sound fundamentals could serve as a downside protection mechanism in case of a market distress event.
- For those wanting to balance risk management and potential returns in the uncertain market conditions ahead, the author suggests making tactical value moves, such as investing in BDCs like CCAP that appear undervalued despite trading close or above their historical valuations.
