BDC Weekly Review: Lender-On-Lender aggressiveness Reaches Private Lending

Sergey Khakimullin/iStock via Getty Images Welcome to another installment of our BDC Market Weekly Review, where we discuss market activity in the Business Development Company (“BDC”) sector from both the bottom-up – highlighting individual news and events – as well as the top-down – providing an overview of the broader market. We also try to add some historical context as well as relevant themes that look to be driving the market or that investors ought to be mindful of. This update covers the period through the first week of June. Market Action BDCs were roughly flat on the week despite a late rally on the back of strong payrolls numbers. The two Blue Owl BDCs underperformed on the week. OBDE had a lock-up expiry while OBDC likely underperformed as investors shifted from it to OBDE on a large valuation gap between the two. Systematic Income BDCs continue to trade at elevated valuations by historic standards, supported by high yields and, largely, resilient portfolios. Systematic Income Market Themes Lender-on-lender aggressiveness is reaching the more staid world of private lending. The way this works is that instead of working together as a single lending syndicate, some lenders split and try to preserve value at the expense of others. A company in trouble would give advantage to one subset of lenders at the expense of others. This often involves the company issuing super-senior secured debt to a participating majority of lenders in exchange for new financing after the restriction on such issuance is lifted by a vote of the majority. This has happened quite a few times in public markets with companies such as J. Crew, Neiman Marcus, PetSmart and others. This appears to be happening with Pluralsight – a technology workforce development company which was acquired by Vista in 2021 and loaded with debt. To make an upcoming $50m payment, the company moved its IP into a new subsidiary and used those assets to obtain additional financing from Vista. Moving assets or asset stripping weakens existing lenders’ claims against the IP. Existing lenders include Blue Owl, Ares, Oaktree, GSAM, Golub and other private lenders. This transaction was not the most aggressive version that’s happened before. For one, the IP was not put into an unrestricted subsidiary which would be out of reach of existing creditors. And Vista also did not pit creditors against each other through a distressed exchange. However, this is still not a great look, particularly if we see more of this happening. Some of the lenders have engaged external counsel to gauge their options. ARCC has a $106m loan out to Pluralsight marked at 85% or 0.9% of net assets. Blue Owl has a $98m loan or 1.5% of net assets, marked at 84%. We should know more details in the Q2 earnings reports. Market Commentary OBDE underperformed on the week. The company announced last week that it is unlocking some shares earlier than expected. Specifically, while 33% of “locked up” shares i.e. those still subject to transfer restrictions were going to be available on July 23rd, half of them (i.e. 17%) were made available for sale this week. Management seem to want to lean into this strength and allow some selling when markets and the stock’s price action are strong rather than wait and roll the dice in July. The view also seems to be that a good Q1, previously announced special dividends and the $100m repurchase program should help support the price as well. The special dividends are unlikely to be much help given the company’s total dividend yield is below the average in our coverage. For the special dividends to make an impact, they should have been made significantly larger. The valuation differential between OBDC and OBDE is now nearly 10% – fairly high since the OBDE IPO. Systematic Income We took this opportunity to partly rotate from OBDC into OBDE which we view as a strong performer with a resilient portfolio. OBDE trades at a 10.9% dividend yield and a 4% discount to book.Check out Systematic Income and explore our Income Portfolios, engineered with both yield and risk management considerations. Use our powerful Interactive Investor Tools to navigate the BDC, CEF, OEF, preferred and baby bond markets.Read our Investor Guides: to CEFs, Preferreds and PIMCO CEFs.Check us out on a no-risk basis – sign up for a 2-week free trial!

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