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BDCs make money by lending to small and mid-sized private businesses at high interest rates.
They have to pay out most of their income to shareholders, which is why they often offer some of the highest yields around.
Today we'll compare the important metrics of the five BDCs I highlighted on Wednesday to find the best opportunities today.
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As a reminder, the 5 BDCs highlighted were:
Blue Owl Capital Corp (OBDC)
Sixth Street Specialty Lending (TSLX)
Hercules Capital (HTGC)
Ares Capital (ARCC)
Main Street Capital (MAIN)
We’ll rank these five based on:
Portfolio Construction
Financial Growth
Balance Sheets
Valuation
We’ll assign points based on objective benchmarks.
The best-scoring stock is our top opportunity today.
Let’s dive in!
Loan Portfolios
Since BDCs are lenders, the first thing to look at is what kind of loans they hold.
There are three main types:
First lien loans – backed by assets, first to be repaid if a borrower fails. Lowest risk, but also the lowest interest rate.
Second lien/mezzanine loans – repaid after first lien loans. Higher risk, but these come with higher rates.
Unitranche loans – a mix of both in one package.
The lower you sit in the repayment order, the more risk you take on, but you can also earn more interest.
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We also want to see a diverse portfolio.
A BDC lending to many different types of businesses across different industries is safer than one that's heavily concentrated in just one area.
Let’s look at the loan portfolios of our 5 BDCs.
Blue Owl Capital Corp
Blue Owl’s portfolio includes:
234 Companies
30 Industries
73% First lien loans
5% Second lien loans
2% Unsecured debt
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They also give us a picture of their diversification.
Internet software and services is the largest industry at 11.1%
Healthcare is next at 9%
Associa is the largest borrower at 3.9%
The top 10 positions are 23% of the portfolio