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I see compelling value in floating-rate preferred shares and baby bonds, especially as credit spreads widen and many now trade at discounts to call value. Recent market volatility and higher interest rates have created attractive entry points in select REITs, BDCs, preferred shares, and baby bonds. I've allocated a significant portion of my portfolio to preferred shares and baby bonds in March 2026.

There is no shortage of BDC bear arguments. Yet, as a BDC bull, I have to say that, arguably, the most critical risk remains overlooked. In the article I discuss this risk in detail (it might make you bearish).

I see recent credit risk repricing as excessively aggressive and overblown, creating potential opportunity. Market reactions often swing violently when sentiment shifts, lacking balanced or rational repricing. Current drawdowns are being fueled by any available argument, logical or not, amplifying volatility.

Both of these BDCs previously held a 'Hold' rating, but today I am upgrading one of them to a 'Buy.' My preference for CSWC is driven by the completion of the expected P/NAV correction, making it a priority pick for its double-digit yield. While MAIN remains an ultra-premium asset, its correction may extend further toward the 1.50x P/NAV level.

Ares Capital, Capital Southwest, and Trinity Capital stand out as attractive BDCs for income-focused investors amid sector headwinds. Rising defaults, increased leverage (average 1.25x), and potential recession risks warrant caution across the BDC sector despite appealing yields. Dividend safety is not guaranteed by spillover income; recent cuts at TPVG and MSDL underscore this vulnerability.

The performance of the VanEck BDC Income Exchange Traded Fund, which includes over 30 BDCs in its market cap-weighted index, gives a good sense of how BDCs performed in these different environments. During the rate-cutting period, which initiated the pressure on BDC profits, BDCs have had to cope with the DeepSeek AI shock, peaking just ahead of that event on 19 February 2025. With AI technologies seemingly set to destroy any potential profitability these firms had, many BDCs were suddenly faced with having to write down large portions of their portfolios. But not all BDCs are in that boat.

Capital Southwest is a premium income BDC delivering a forward yield near 12% with a 40-year dividend track record and internally managed structure. CSWC's hybrid model leverages lower middle market lending and equity stakes, supporting both recurring and supplemental dividends through realized gains and undistributed taxable income. Recent double-digit top-line growth and a new senior loan JV reinforce CSWC's active, compounding business model, though future growth is expected to moderate.