Dumping 2 BDCs Before Rates Fall: Essential Finance Expertise

The article discusses two business development companies (BDCs) to avoid before interest rates fall. BDCs are highly exposed to interest rate risk, which means they typically suffer when interest rates decline. The article suggests that investors should be cautious and avoid these companies when interest rates are expected to fall.

Business Development Companies (BDCs) are financial entities that invest in debt securities and other assets. However, their exposure to interest rate risk makes them particularly sensitive to changes in interest rates. When interest rates decline, BDCs typically suffer, as they are often reliant on floating-rate loans and debt investments that are linked to the Federal Reserve's interest rates [1].

The article discusses two BDCs, Barings BDC (BBDC) and Golub Capital BDC (GBDC), which are highly exposed to interest rate risk and may be at risk of dividend cuts if interest rates continue to fall. Both companies have a history of high dividend yields and relatively thin margins of safety, making them vulnerable to changes in interest rates.

Barings BDC (BBDC) has a history of dividend cuts, including during the 2008 financial crisis and the COVID-19 pandemic. Its recent financial performance has shown a decline in net investment income per share (NII), which is a key indicator of a company's ability to sustain its dividend payments. The company's dividend coverage ratio is currently thin, with the base dividend covered by only 104% of the underlying NII per share generation. Additionally, BBDC has a high debt-to-equity ratio of 1.28x, which limits its financial flexibility and ability to grow its asset base. If interest rates continue to fall, BBDC's dividend sustainability may be further compromised [1].

Golub Capital BDC (GBDC) is another high-quality BDC with a relatively long history. However, it also has a thin margin of safety, with its base dividend coverage level at 100% as of Q2, 2025. The company has a high non-cash income stream through PIK (principal and interest payments) that effectively means its cash dividend is not covered. Additionally, GBDC has a debt-to-equity ratio of 1.18x, which provides some room for incremental debt, but any significant increase in debt would make the company more sensitive to changes in interest rates. The company's dividend sustainability may be further compromised if interest rates continue to fall and non-accruals increase [1].

Investors should be cautious about these two BDCs, as they are highly exposed to interest rate risk and may be at risk of dividend cuts if interest rates continue to decline. The Federal Reserve's recent actions, including interest rate cuts and a dovish stance, suggest that further rate cuts may be on the horizon. Prudent investors should pay attention to the margin of safety in their BDC picks and anchor their expectations around the negative scenario of falling interest rates and unchanged spreads.

References:
[1] https://seekingalpha.com/article/4791793-2-bdcs-to-dump-before-rates-fall