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Private Debt Executives Load Up on BDC Shares After Sell-Off

Kelsey Butler

(Bloomberg) -- Business development companies, known for lending to mid-sized corporations, have taken a pummeling in the equity market rout. Now some of their leaders are swooping in to buy beaten-up stock in what some analysts say is a sign the sell-off is overdone.

Principals at many of the vehicles are snapping up their equity on the cheap after the firms’ shares plummeted 48% in about a month amid the credit crunch sparked by the coronavirus pandemic.

Executives at a slew of vehicles including Bain Capital Specialty Finance Inc., Hercules Capital Inc., Monroe Capital Corp. and Oaktree Specialty Lending Corp. have snapped up an aggregate of $11.3 million in shares of the BDCs between Feb. 18 and March 19, according to a Thursday note from JMP Securities analyst Christopher York. Additionally, Prospect Capital Corp. CEO John Barry has snapped up $132 million of the company’s stock. In the past, such buying has been a good signal of recovery for BDCs and the broader credit markets, York said.

“These times are certainly different but the purchase of stock by insiders does give us some comfort in management’s confidence in the portfolio and business, which is contrary to what the market is telling us,” York wrote.

Read more: Credit manager on buying spree after shares of his fund tumble

BDCs, which are popular with mom and pop investors, have been battered as those buyers fled amid broad turbulence in the equity markets from the coronavirus outbreak.

Since the last financial crisis, BDCs have ballooned to become a $112 billion pocket of private debt, up from around $20 billion in 2009. They’re facing their most serious test yet as asset prices slump and credit losses mount.

Read more: How a boring loan backwater got glammed, and riskier

Monroe Capital chief executive officer Ted Koenig said in emailed comments to Bloomberg that he doesn’t think the market is valuing his firm correctly. “Current market conditions have caused much dislocation and good buying opportunities that have not existed previously,” he added.

Still, not all BDC executives are rushing to purchase beaten-down shares. York said in the note that vehicles including Capitala Finance Corp. and MVC Capital Inc. weren’t seeing big management buying, which “does signal an expectation to investors that there is a greater risk in these BDCs.”

Representatives for Bain, Capitala and Oaktree declined to comment. Requests for comment from Hercules and MVC weren’t immediately returned.

Although it’s likely that news about the coronavirus and its economic fallout will only worsen, BDCs may not tumble much further after their punishing month, York wrote.

“While we expect the news about the disease and impacts on the U.S. and global economies to continue to get worse over the next couple of weeks, we think the markets have already priced in expected credit losses significantly in excess of the credit crisis and potentially on par with a depression,” the note said.

(Adds context on total amount of shares, Prospect Capital Corp. purchases in paragraph three.)

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