All That Glitters Is Not Gold: 2 BDCs To Avoid Before They Cut Again

The Business Development Company (BDC) sector has long been a magnet for income-seeking investors, but not all BDCs are created equal. While many have thrived by providing debt and equity capital to small and mid-sized businesses, a handful now face mounting risks that could lead to dividend cuts in 2025. Two names—Great Elm Capital Corp. (GECC) and TriplePoint Venture Growth BDC (TPVG)—stand out as particularly vulnerable. Let’s dissect why their dividend sustainability is in doubt and what investors should watch for.

Why BDCs Are Under Pressure

BDCs operate in a precarious balancing act: they borrow at low rates to lend at higher rates, pocketing the spread. But this model falters when interest rates rise, credit conditions tighten, or portfolio companies falter. The Federal Reserve’s prolonged rate-hike cycle and a weakening economy have already strained many BDCs.

Now, two companies are flashing red flags. Let’s dive into their specifics.

1. Great Elm Capital Corp. (GECC): A Losing Streak

Current Dividend: $0.12 per share monthly (equivalent to $1.44 annually)
Key Risk Factors:

• Net Losses and Portfolio Struggles: In Q1 2024, GECC reported net realized and unrealized losses of $0.42 per share, a stark contrast to its investment income of $1.03 per share. This gap suggests that while GECC is generating income, its portfolio’s declining valuations are eroding its capital.
• High-Yield, High-Risk Investments: GECC’s portfolio carries a 12.5% weighted average yield, which may seem attractive but often comes with higher default risks. The healthcare and telecom sectors, where GECC is heavily invested, face regulatory and competitive headwinds that could trigger defaults.
• Dividend Sustainability: To maintain its dividend, GECC is relying on unrealized gains—a risky proposition. If those gains turn into losses (as they did in Q1), the dividend could be in jeopardy.

The Verdict: GECC’s losses and reliance on volatile income streams make it a prime candidate for a dividend cut. Investors should ask: Can GECC’s portfolio weather rising defaults without cutting payouts?

2. TriplePoint Venture Growth BDC (TPVG): Shrinking Portfolio, Shrinking Profits

Current Dividend: $0.16 per share monthly (equivalent to $1.92 annually)
Key Risk Factors:

• Declining Investment Income: TPVG’s investment income dropped from $33.6 million in Q1 2023 to $29.3 million in Q1 2024, a 13% decline. This was driven by a smaller principal investment base ($322 million vs. $374 million) and fewer portfolio companies (49 vs. 59).
• Portfolio Concentration Risks: TPVG’s reduced portfolio suggests it’s struggling to deploy capital in a tough market. Smaller portfolios mean less diversification, increasing exposure to individual company failures.
• Leverage and Interest Rate Sensitivity: TPVG has $1.3 billion in total assets but $590 million in debt, implying significant leverage. With borrowing costs still elevated, interest expenses could squeeze net income further.

The Verdict: TPVG’s shrinking portfolio and reliance on debt make it vulnerable to a dividend cut if its investment income continues to decline.

The Bigger Picture: Why the Sector Is at Risk

Both companies face headwinds beyond their individual issues:

• Interest Rates: The Fed’s rate hikes have pushed the 10-year Treasury yield above 4%, squeezing BDCs’ borrowing costs.
• Economic Slowdown: Smaller businesses, which form the core of BDC portfolios, are struggling with inflation and weak demand.

Conclusion: Proceed With Caution

Investors in BDCs must remember: dividends are not guaranteed. GECC and TPVG’s struggles—shrinking income, portfolio losses, and high leverage—paint a clear picture of their vulnerabilities.

• GECC’s 11.7% 5-year expected return hinges on its ability to stabilize its portfolio. A single default in its top holdings (e.g., a healthcare firm) could trigger a dividend cut.
• TPVG’s 19.5% 5-year return looks enticing, but its shrinking investment base and rising costs suggest this may not hold.

The writing is on the wall: avoid these two until they demonstrate resilience. Instead, focus on BDCs with diversified portfolios, strong balance sheets, and consistent net investment income. In 2025, not all that glitters will be gold—especially in this sector.