Private Credit @ 50% Off | 13.94% Forward Dividend Yield On OBDC?

13.94% forward dividend yield on a business development corporation (BDC) and  some are paying even more? Might this be a buying opportunity?

Transcript

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13.94% forward dividend yield on a BDC. Some are paying even more. Might this be a buying opportunity? Hi everyone, and welcome back to part three of our private credit mini-series on markets with Marcos. As we've discussed in our first two private credit videos, linked below for your convenience, retail investors in private credit have been running for the exit in droves over potential concerns of a broader deterioration in their credit markets. Interval funds are getting more redemptions than they can meet, and most have started to gate or restrict the amount of redemptions to the legal minimum of 5% of the total fund volume per quarter. Business development corporations, or BDCs, which provide another way that retail investors can own private credit, have seen their stock price fall dramatically. In fact, they've fallen so much that the member video we just released in our VIP Investment Club covered six potentially attractive BDC and fund opportunities in the private credit space, including one with a 13.94% forward dividend yield at the time of this taping on March 27, 2026. More about this in a moment. Some of the higher risk BDCs even showed forward-looking yields as high as 26.03% on Morningstar. I've included the link to our VIP Investment Club in the video description if you want to drop in to our member zone and join our daily discussions. Now, for some investors with the right risk appetite and knowledge, this may possibly be a good time to start picking up some BDC shares if you believe that the fundamentals point more to a liquidity crunch rather than a total private credit meltdown. So, with that in mind, here are the three topics that we will be covering today in part three of our private credit miniseries. 1. How far have BDC share prices fallen on average over the past 12 months? 2. What does history tell us about episodes in the past when BDCs were trading at a heavy discount? And three, what other information can help guide investors looking for potential buying opportunities in private credit right now? Let's get started. How far have BDC share prices fallen on average over the past 12 months? Recall from our first two private credit videos that business development companies or BDCs package a portfolio of illiquid loans into a closed-end fund, whose shares are then listed and traded on a stock exchange. Like for all private credit investments, the underlying portfolio of a BDC remains fundamentally illiquid, meaning the private loans it holds are hard to trade and rarely sold before maturity. Consequently, the BDC will generally assume a buy and hold scenario for its loans and value or put a price on the loans accordingly. The industry calls this method the net asset value or NAV for short. So if a loan is expected to pay all coupons and repay the principal in full at maturity, the NAV of the loan will generally be 100% in the books. Which makes sense, because that's what the investor will get at maturity under a standard no default scenario. The NAV is generally quite stable and will only be adjusted if a significant event happens. For example, if there is a significant deterioration in credit quality or an actual default. Despite the illiquidity of a BDC's underlying portfolio, however, an investor can buy and sell shares in the BDC at any time that the exchange is open. The price that an investor gets for these BDC shares will be purely determined by the loss of supply and demand in the market, however. The shares can and usually will move daily and fluctuate with the markets, which also means that the latest share price can be more, less, or the same as the generally more stable NAV with its buy and hold assumption. At the time of this taping, as per March 27, 2026, the shares of some of the largest BDCs are trading at a substantial discount to the NAV in the markets. For example, Blue Owl Capital Corp OBDC is trading at a discount to NAV of 27%, with a forward dividend yield of 13.94% at the time of this taping, March 27, 2026, the example I mentioned before. For those of you who may not be familiar with OBDC, it got entangled in a public storm when the proposed merger, this is non-traded sister fund, OBDC2, failed last year. Its non-traded sister fund then basically went into liquidation mode, but things pretty much spilled over to our publicly traded OBDC here as well. Its share price hasn't really recovered since. VIP Investment Club members, please refer back to this month's BDC video as well as our February member live here for a deeper dive into OBDC and who we think might potentially consider it for their portfolio at this point in time. BDCs overall trade at a discount of 24% of NAV on average at the time of this taping, March 27, 2026. There are even some higher risk BDCs that are trading at more than 50% discount to NAV, basically half off, if you want to look at it that way. Depending on your perspective and risk appetite, you could see these discounts either as an opportunity to snap up some private credit exposure on the Jeep, so to speak, or as a warning sign that the market may already be pricing in potential future credit losses that aren't reflected in the NAV yet. Now, we don't have a crystal ball here at Diamond Nestec, and we don't know the answer to this question for sure either. As we warned our VIP members, you should always read the prospectus of any investment you're going to dive into. And even then, especially as a retail investor, you can never really be 100% certain what's in these BDC's portfolios or what the potential credit fallouts might be in the future. But what we can do is to look at episodes in the past when BDCs were trading at a heavy discount and whether investors would have made a profit or a loss by buying at the right moment, while keeping in mind, of course, that past performance is not indicative of future results and outcomes. So, with that in mind, let's move on to the next part of today's video. What does history tell us about episodes in the past when PDCs were trading at a heavy discount? Let's start with a chart from Cliffwater, the private credit firm that also publishes the Cliffwater Direct Lending Index, or CDLI, that remains the most watched indicator for the private credit market at the time of this taping, as far as we can tell. This chart tracks only a subset of the market, though. The 41 publicly traded BDCs that are represented by the Cliffwater BDC Index or CWBDC. So this zero line here in the middle is where the NAV, the net asset value of a BDC is the same as its market cap. In other words, the discount between the NAV and the share price is exactly zero. If the black line, essentially the price line, is below zero, the BDCs trade at a discount to NAV. And if the black line is above the zero, the BDCs trade at a premium, meaning you have to pay more than their NAV. And what we see here is that in past periods of market stress, the share prices of the 41 publicly traded BDCs as tracked and measured by the Cliffwater BDC Index fell by often substantial double digit percentages below the net asset value. For example, the discount was up to 65% during the great financial crisis in March 2009, 17% during the Euro crisis in September 2011, 21% during the oil crisis in February 2016, when oil prices dropped dramatically, a whopping 51% again in March 2020 when COVID first hit, and 17% just two years later in June 2022, when the Fed started raising rates steeply to combat inflation post-COVID. And here at the end, we see the discount of 24% at the time of this taping, by March 27, 2026. But back to the earlier episodes. Back then, just as now, many had suspected that these deep discounts might be a warning of trouble ahead for private credit. However, they generally turned out to be actually an opportunity for investors with the right risk appetite. You can see in the chart that the Cliffwater BDC Index usually recovered quite quickly and closed the gap with the NAV in these past episodes. Now, the gap was often not only closed by the price of the BDCs going up again. Sometimes the BDCs did bring down their NAV as well a bit. And this usually happened when hard credit events forced a write down on the book values of the underlying loans. In this next chart here, the blue line shows the Cliffwater BDC Index or CWBDC. And the solid black line shows the NAV, the net asset value of the BDCs in the index. Where the black line goes down a bit, it shows that there were some hard write downs that reduced the NAV of the BDCs, most visibly in the great financial crisis, then COVID, and again during the post-COVID inflation of 2022. However, these NAV write downs, the hard credit losses, to oversimplify a bit, were always comparatively small. The largest driver of the discounts and recoveries was always the share price, the blue line here, which was much more volatile in a crisis than the NAV, both up and down. And this observation fits with what we discussed in the first two public videos of our private credit mini-series. When too many investors want to get out of BDCs at the same time, and potentially even start a run on private credit, they will hammer down BDC share prices. This is just a mechanism that balances out the fundamental illiquidity of private credit with the free tradability of BDC shares. In other words, if this observation holds true, the currently large discounts of BDC shares versus the NEV might point more towards a liquidity crunch and not necessarily a coming credit meltdown. And could be a buying opportunity for the right investor. Cliff Water comes to the same conclusion in a more technical language. Private debt returns are disconnected from deeply discounted BDC public markets. In my own words, deep discounts, at least historically, have not generally predicted subsequent bad returns in private credit. Now, we don't know the outcome of our most current episode yet, and there is absolutely no guarantee that things will play out in the same manner as they did in the past. So let's look at another, somewhat similar asset class to see what intelligence we can take away from there. What other information can help guide investors looking for potential buying opportunities in private credit right now? As we just discussed, all indices are down for BDCs. On this chart, you can see that BIZD, an ETF based on the 35 name MVIS US Business Development Companies Index, is down 27.6% year over year as measured by its share price at the time of this taping, March 27, 2026. In contrast, USHY, the iShares broad US high yield corporate bond ETF, is down only 1.1% versus a year ago. Now, while USHY holds high yield debt as well, it is not directly comparable to private credit, because the high yield bonds that it holds are both traded and liquid, as well as generally more exposed to larger companies and projects than to the mostly mid-market illiquid loans that BDCs have in their portfolios. Now, if investors were expecting a systemic meltdown in the private credit market, which would potentially spread to other parts of the economy as well, personally, we would expect USHY to also show some steeper drops to reflect that risk. But this does not appear to be the case at the time of this taping. So how do we explain the much worse performance of the BDC index versus USHY over the same period? In our personal opinion, even if we allow for some credit losses in the BDC world, a good part of the recent fall in BDC share prices may again be driven by the fundamental mismatch between the instant liquidity that most retail investors demand and the illiquid nature of the assets that BDCs own. So when too many investors sell all their BDC shares at the same time, prices may just get depressed more than the fundamental credit risk situation would indicate. Meaning it would again be more of a run-on-the-bank situation than a credit crisis if this assumption proves true. Seen from another perspective, some investors simply may not have understood what they were buying, which is never a good thing, by the way, and may now be dumping shares below their fair long-term value in their rush to get out. Perhaps that's a good thing for the more adventurous investors in our community who might want to snap up some BDC exposure on the cheap, so to speak. But today sellers may potentially regret it if prices recover in due course. As we often say at Diamond Nasdaq, don't buy what you don't understand, and don't buy what keeps you up at night, lest you suddenly panic and sell at the bottom of the market. That said, it's by no means certain that prices will recover in due course. No one can predict the future, and there are no guarantees. Maybe the discounts we currently see are actually early warning signs of a larger credit downturn or deeper fundamental issues within the private credit space, as we shared in our first two public videos on private credit, linked below. Please make sure you watch them, read the prospectus of whatever you plan on buying, and fully understand what you're getting into before you make any investment decisions. Because depending on what your individual perspective might be, there may be some potential attractive buying opportunities in private credit for investors with the right risk appetite. And it may not just be OBDC with its 27% discount to NAV and a forward dividend yield of 13.94% at the time of this taping on March 27, 2026, as we discussed before. There are a number of other BDCs out there that trade at substantial discounts currently. And if you want to explore OBDC and other opportunities a bit more, I've included all the links to our VIP Investment Club below this video. And hope to see you there soon to join our conversations with other like-minded investors about private credit and other potentially higher yielding assets. Thanks for watching and see you again soon.