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BDC Common Stock Market Recap: Week Ended September 18, 2020

Posted on September 21, 2020

BDCs: Multiple

BDC COMMON STOCKS

Tough

Pity the major indices in September. Or, at least since September 2.

The Dow is down (3.0%); the S&P 500 (4.6%) and the NASDAQ – home to the previously favored technology stocks – is off (6.6%).

This week again the indices were weak, with the S&P off (0.64%).

The BDC sector, though, for yet another week marched off to its own drummer, with BDCS up 0.35%

Up And Down

Which is not to say that once we get behind the headline number the BDC sector was all rainbows and teddy bears.

In fact, more individual stocks were lower in price than flat or higher: 24 to 22.

Furthermore, while 6 BDCs were up 3.0% or more in price on the week, 9 were down by (3.0%) or more.

Best Of All

On the positive side – and way ahead of everyone else – was Investcorp Credit Management BDC (ICMB).

The BDC – which used to be CM Finance – reported full year and quarterly results through June, officially ending BDC earnings season for another quarter.

As we noted in the BDC Data Table, ICMB’s results were only FAIR, as NAV Per Share dropped by (4.4%) in a quarter where most BDCs posted a gain.

By the way, that’s 8 quarters in a row of lower NAV Per Share and a (35%) drop since IVQ 2017, our starting point for analyzing BDC NAV changes.

We are still waiting on the BDC’s 10-K, but did review the conference call transcript and are just waiting for the official filing to shed light on some issues.

Cheering

In any case, the market had so discounted the fortunes of ICMB  that even moderately positive news was greeted with the kind of enthusiasm you see when cities are liberated.

The stock was at $3.30 just before the results were published and ended the week at $4.38.

Still, ICMB trades at a (44%) discount to that lowered book value per share and 5.8x 2021 projected earnings.

Those numbers only accentuate how hopeless the mood amongst the BDC’s shareholders was before the results were posted.

To give readers a sense of the disparity between BDCs: Main Street (MAIN) – still way off its highest pre-Covid level – trades at 13.9x 2021 projected earnings and at a 46% premium to book

Not Alone

This week – coincidentally or otherwise – all top 4 BDCs by percentage price increase were prior underperformers.

Besides ICMB, there was OFS Capital (OFS); Medley Capital (MCC) and Portman Ridge Financial (PTMN).

OFS could point to its just completed Baby Bond offering, which may have helped its liquidity, or at least, resolved any outstanding issues with one of its secured lenders.

Just the fact that OFS could tap the Baby Bond markets at a pretty decent yield seems to have encouraged investors who pushed the price just shy of 10% higher.

Radio Silent

There was no publicly disclosed development at either MCC or PTMN, so your guess will be as good as ours as to why they were up 6.9% and 4.1% respectively.

Same At The Bottom

There was no particular rhyme or reason, either,  to the BDCs down in price during the week, led by PNNT (8.1%); MRCC (7.9%) and First Eagle (7.8%).

Unmoved

What we’re a little clearer on is that after all the individual price surges and purges, the BDC sector – from a price standpoint – remains in a narrow channel that began May 27.

See the chart below of BDCS over this period:

We’ll shortly be celebrating four months of this relative calm – much appreciated after the Wagnerian drama of March.

Thanks to the nature of the BDC model –  regularly pumping out most of its taxable income as distributions – this is helping the sector recoup some of its 2020 losses.

Counting The Cost

We had a look at the price of the Wells Fargo Scorecard Weighted BDC Index from December 31, 2019 till Friday – which provides a “total return” picture and found the net loss is “only” (20%).

Even if BDC prices don’t move any more from here by the time we’re singing Auld Lang Syne and gladly kicking 2020 out the door, the sector might be able to keep its overall loss in the middle to low teens.

Nothing to crow about, but remember that in 2019 the Wells Fargo index was up 27%, and between the end of the Great Recession and February 20, 2020 had increased by 73%.

You don’t get double digit increases in any investment without the risk of double digit losses, as the BDC sector has perfectly illustrated in just the last two years.

Truth Telling

We’re also very clear  that in the future – as in the past – individual BDC results will vary.

Enormously.

We like to plumb the Seeking Alpha long term “total return” tables for a reminder.

For example, you could have invested 5 years ago in Newtek Business (NEWT) and achieved a 134% “total return” or trusted in Medley Capital (MCC) and lost (82%).

Just YTD – and speaking only about price changes – the range is between (7%) at best and (81%) at worst.

Faith

Nonetheless, the BDC Reporter is a believer that BDC investing over the long term term done right can generate great results, and not only if you happen to bet on the right very top performers.

We undertook some calculations and determined that the average annual “total return” for the 20 BDCs with a 10 year history was 11.0%.

Of the BDCs involved, 8 generated annual returns of 10% or more, including 6 at 20% or higher.

Making The Right Choice

This is a sector where “stock picking” is of paramount importance.

Any BDC – as we’ve seen this and every other week that we write these Market Recaps – can be on top of the leaderboard for a week or two.

Being a consistent top performer over 3, 5 or 10 years is much harder, but not impossible.

Relative Importance

Buying low and selling high is important for achieving BDCs as in any other stock, but given that so much of long term returns come from distributions, which names you own is even more important.

At the end of the day, investors who can find the BDCs with the most sustainable or growing dividend streams over the long term are almost guaranteed bumper returns whatever happens to price levels in the short or medium term.

We double checked the dividend performance of the top 10 “total return” BDC performers – whose average annual gain has been 15.6%.

According to our records, 9 out of 10 maintained a stable or increasing dividend stream through that half decade period.

(Even that one exception only reduced its payout by -13%).

Readers will understand why the BDC Reporter spends so much time seeking to sussing out individual BDC dividend “sustainability”.

If one can get the crystal ball working on the outlook for a BDC’s payout, most of the work necessary to be successful as a long term investor in this sector is done.

Hopeful Sign

At the moment about half of all BDCs – despite the most shocking market conditions in over a decade – have managed to maintain or increase their regular distributions.

In the Great Recession only a fifth managed to avoid cuts or suspensions.

That’s a hopeful stat and suggests there are still many BDCs to choose from as candidates for achieving superior returns through 2025 and beyond.

The BDC Reporter will continue to kibitz weekly about individual BDC prices, while also keeping an eye on medium and longer term performance.


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