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Oppenheimer analyst Mitchel Penn downgraded Barings BDC (BBDC) to Performance from Outperform after the business development firm posted net losses in the fourth quarter, primarily from unrealized losses at Core Scientific (OTCPK:CORZQ).
The analyst noted that cost and equity the value of its non-accrual investments increased compared to the prior quarter. As of December 31, 2022, non-accrual investments were $98.8 million on a cost basis vs. $69.1 million as of September 30, and on a fair value basis were $24.3 million at the end of the quarter quarter vs. $17.1 million at the end of Q3.
“We are increasing our discount rate from 50 bps to 10.5% to reflect historical credit problems, which reduces FV (fair value) from $1 to $9 per share,” Penn wrote in a note to clients.
He calculated that Barings BDC (BBDC) can earn a 9% return on equity and, given an estimated cost of equity of 10.5%, calculates a fair value of $10, or 0.81 times book value.
Penn also noted that the company does not publish internal ratings on its portfolio and encouraged management to provide more information if the economy continues to slow.
The yield rating aligns with Hold’s SA Quant rating and clashes with Strong Buy’s average Wall Street rating.
Note that Barings BDC’s (BBDC) net interest income and total investment income for the fourth quarter beat analysts’ median estimate.
SA contributor George Spritzer, who rated BBDC Buy, sees an attractive 10.8% yield with some downside protection.