By Bill Alpert

The nonbank lenders known as business development companies thrived on the high interest rates of the past few years. As rates fall back, so have the stocks of the BDC mutual funds, which make high-interest-rate loans to midsize businesses -- often as part of a private-equity buyout. The S&P 500 is up 12.5% this year. BDCs have fallen by about 5% on average.

This week, BDCs are falling further. Ares Capital Corp., Blackstone Secured Lending Fund and FS KKR Capital Corp. were all off about 3.5% from Friday. Blue Owl Capital Corp. is down about 3%.

"We don't see any particular factor that would drive a drop in the share price," says Craig Packer, the co-president of Blue Owl Capital, who runs their credit activities. "The whole sector has been down."

Credit performance in Blue Owl's BDCs continues to be strong, he says.

As for the biggest BDC -- Ares Capital -- one reason for a drop is clear: The fund paid a $0.48 dividend Monday, which amounts to about half that stock's price drop.

Ares, Blackstone, and KKR had no comment on the movements in their BDC shares.

Rumors circulated that quant investors might be using BDC stocks as part of an interest rate bet. Expectations for Wednesday's meeting of the Fed's Open Market Committee had been for a rate cut of 25 basis points, or a quarter of a percentage point. Someone betting on a 50-basis-point cut might also bet that the bigger rate drop will reduce BDC interest income, since most of their loans are floating rate.

Packer says that short term rate moves don't really impact BDCs. What matters more is the forward rate curve for the next couple of years. The base rate for BDC loans is the overnight lending rate known as the SOFR.

Industry's profits swelled while the SOFR rate rose after 2022. Most BDCs were earning more than their dividends. Many chose to pay out surplus earnings through supplemental dividends, rather than greatly boosting their base dividends. Now the SOFR is falling.

At Keefe, Bruyette & Woods, analyst Paul Johnson says that about half of the 30 BDCs that he covers are now not earning their dividends. He expected dividend cuts to begin in 2026, but bigger-then-expected cuts by the Fed could accelerate that. Johnson figures that a 50-basis-point decline in the SOFR base rate will reduce the average BDC's earnings by about 3%.

When BDCs traded at premium valuations last year, their share prices exceeded the mutual fund measure of book value known as net asset value. This year, the sector has settled back to a bit below NAV. The group's long-term average is about 92% of NAV.

Blue Owl Capital is down to 90% of NAV. That should make its 11.5% dividend yield quite attractive in an environment where high yields are hard to come by, Packer says.

There are a lot of BDCs out there, and they vary in how much they borrow themselves, to boost yields. FS KKR Capital Corp. has had one of the higher debt-to-equity ratios, and its stock has sunk to 80% of NAV. As its shares have slid, its dividend yield has stretched above 15%.

KBR's Johnson has Holds on the BDCs of Blackstone, Blue Owl, and KKR.

He rates Ares Capital at a Buy. "They have proven for a very long time that they are the best in the space, and it is unlikely that they are going to have to reduce their dividend," Johnson says.

Write to Bill Alpert at william.alpert@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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September 16, 2025 17:03 ET (21:03 GMT)

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