Muzinich BDC, Inc. Annual Report: A Plain-English Guide

I’ve put together this guide to help you understand how Muzinich BDC, Inc. operates. My goal is to translate complex filings into simple terms so you can decide if this investment fits your goals.

1. What does this company do?

Muzinich BDC acts as a lender for "middle-market" companies—businesses typically making $10 million to $50 million in annual profit. As a "Business Development Company," they raise money from investors to provide loans to these private firms. They earn money by collecting interest on these loans. Because these loans often have floating interest rates, the company can protect its income when market rates rise.

2. Financial performance: A tough year

2025 was a difficult year. The company reported a $12.8 million loss, a sharp drop from the $11.9 million profit earned in 2024.

Why the decline?

• Lower Income: Total investment income fell to $17.1 million from $23.8 million in 2024. This happened because the portfolio shrank as loans were repaid or written off.
• Valuation Drops: The company marked down the value of its portfolio by $14.2 million, reflecting the declining financial health of the companies they lent to.
• Troubled Loans: Three loans, worth about $9.4 million, are now on "non-accrual" status. This means these borrowers cannot pay their interest, so the BDC has stopped counting that interest as income.

3. How the Adviser gets paid

The Adviser manages the company, and you pay for their services:

• Management Fee: They charge 1.0% annually based on the total value of the portfolio. They collect this fee even if your investment loses value.
• Performance Bonus: They take 12.5% of profits, but only after you receive your original investment back plus a 7% annual return.
• Operating Costs: You pay for almost all operational costs, including travel, legal fees, and office expenses. There is no cap on these costs. This can significantly reduce your returns when income is low.

4. Major wins and challenges

• The "Lender Gap": Traditional banks are lending less to middle-market companies. Muzinich fills this gap, allowing them to charge higher interest rates and set stricter rules for borrowers.
• Hands-on Monitoring: Because these companies don't report publicly, the Adviser visits them quarterly to check their health and spot problems early.

5. Financial health and "The Rules"

• Borrowing Limits: The company borrows money to increase its lending power. However, they must keep their "asset coverage" at 150%. For every $100 of your money, they can borrow up to $200. This leverage can boost returns, but it also creates risk. If the portfolio value drops, they might have to sell assets at a loss to pay back debt.
• Valuation Risk: These investments aren't traded on a public exchange. The Adviser estimates their value using private models. These estimates may not reflect the actual cash they would get if they had to sell the loans today.

6. Key risks

• "Harvest Mode": The company stopped adding new investments in August 2023. They are now just collecting interest and paying back investors. You should not expect your shares to grow in value.
• Extreme Illiquidity: You cannot easily sell your shares. There is no public market, and you need the company’s permission to transfer them. Your money is locked up until the fund closes.
• Tax "Gotchas": You may be taxed on "phantom income." This happens when the company reports taxable gains that you are treated as receiving, even if the company keeps the cash to pay down debt. You could end up with a tax bill but no cash in your pocket.

7. Future outlook

The company plans to wind down. They aim to finish by August 2028, though the Adviser can extend this by two years. Because the portfolio is no longer growing, the focus is entirely on recovering as much cash as possible from existing loans before closing the fund.

Final Thought for Investors: Given that the fund is in "Harvest Mode" and winding down, this is no longer a growth investment. Your primary focus should be on the company's ability to recover cash from the remaining portfolio and the potential tax implications of the final distributions. Before making a decision, consider whether you are comfortable with your capital being locked up until the fund completes its liquidation process.