Deep Value Play in BDC Sector: Crescent Capital BDC

Crescent Capital BDC is identified as the best deep value play in the BDC sector. The article discusses two BDCs that deviated from the core recommendation of prudent BDC investors. The author suggests that Crescent Capital BDC is a promising investment opportunity due to its deep value proposition.

Crescent Capital BDC Inc. (CCAP) has emerged as a compelling deep value play within the BDC (Business Development Company) sector. Despite deviating from the core recommendation of prudent BDC investors, CCAP has shown resilience and potential for attractive returns. This article delves into the reasons behind its deep value proposition and evaluates its investment opportunities.

Earnings Highlights and Financial Performance

In the second quarter of 2025, Crescent Capital BDC reported a net investment income of $0.46 per share, an increase from the previous quarter's $0.45 per share. This performance is notable for maintaining a 110% base dividend coverage ratio, indicating strong earnings relative to dividends [1].

The company's investment portfolio remains highly diversified, consisting of 187 companies with an average investment size of approximately 0.6% of the total portfolio. First lien loans, which represent 91% of the portfolio at fair value, have been a consistent focus [1].

Dividend and Payout Ratio

Crescent Capital BDC declared a regular dividend of $0.42 per share for the third quarter of 2025, marking its 38th consecutive quarter of earning its regular dividend. However, the company's payout ratio stands at 144.8%, significantly exceeding the sector average of 41.5%. This high payout ratio raises concerns about the sustainability of its dividend strategy [2].

Portfolio Health and Risks

The company's net asset value (NAV) per share decreased by $0.07 from the previous quarter, primarily due to a special dividend payment. The watch list, which includes investments with potential credit issues, increased to 14% of the portfolio. Additionally, there was a slight increase in internally rated 4s and 5s, indicating a rise in the most challenged investments [1].

Despite these challenges, Crescent Capital has a track record of managing recoveries even in high-risk situations. The presence of financial covenants in the portfolio allows for frequent dialogue with management, providing real-time visibility and outlook [1].

Investment Implications

For income-focused investors, CCAP's $0.42 dividend remains attractive, particularly in a low-yield environment. However, the high payout ratio and declining NAV necessitate caution. The dividend is currently supported by net investment income, but this could change if investment income continues to decline [2].

Key considerations for investors include monitoring net investment income trends, assessing NAV recovery, and evaluating portfolio health. A sustained drop in NII could force CCAP to reduce dividends or tap into reserves, while a narrowing discount to NAV would signal improved market confidence in the company's fundamentals [2].

Conclusion

Crescent Capital BDC's deep value proposition is evident in its significant discount to intrinsic value and high dividend yield. However, the high payout ratio and declining NAV create a precarious balance. Investors seeking yield should weigh the risks of a potential dividend cut against the rewards of a 10.6% yield. For those with a higher risk tolerance and a long-term horizon, CCAP could offer compelling returns if its portfolio stabilizes. For others, a cautious approach—monitoring the company's financials and diversifying holdings—may be prudent.

References

[1] https://finance.yahoo.com/news/crescent-capital-bdc-inc-ccap-072119078.html

[2] https://www.ainvest.com/news/crescent-capital-bdc-dividend-sustainability-declining-net-investment-income-2508/