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BDC Common Stocks Market Recap: Week Ended April 24, 2020

Posted on April 27, 2020

BDC COMMON STOCKS

 

Respite

The week ended April 24, 2020 saw the smallest percentage change in BDC sector prices since the Covid-19 crisis began.

The UBS Exchange Traded Note with the ticker BDCS, which we use to measure sector price changes, moved down a very minimal (0.58%).

Compare that to a 29.3% upward weekly movement just a fortnight before.

With the BDC sector beginning earnings season this coming week, investors seem to have found their footing.

 

Looking Closer

Or have they?

That overall percentage move notwithstanding, the metrics we look at every week also tell us that 28 BDCs were up in price and 27 were down.

Furthermore – and even more indicative of minds not yet being made up – 9 individual BDCs moved up by 3% or more in the week.

Likewise, 18 BDCs moved down (3%) or more.

 

Big

Some of the stock moves remained impressively large, akin to the weeks past.

For example, WhiteHorse Finance (WHF) moved up 35% in five days, Monroe Capital (18%) and Capital Southwest (16%).

On the flip side – and less spectacularly – Stellus Capital (SCM) dropped (11%); FS-KKR Capital (9%) and OFS Capital (7%).

All of which suggests that investors are still guessing wildly at what individual BDC performance will look like in the long run.

 

Bigger Picture

Overall, BDCS is down (42%) at this stage from the level at February 20, which also corresponds closely to the year-end 2019 level too.

Still, individual results do vary.

Seeking Alpha data report shows that on a YTD basis, the “best performing” BDC is down (20%) and the worst (73%).

That’s a lot of variation in a short period of time and with all the BDCs in the same leaky boat.

For the record, things are still pretty grim with only 1 BDC trading above 2019 book value per share levels (MAIN).

The NAV bar is about to be lowered with the announcement of IQ 2020 results over the next few weeks.

 

Variety

The estimates offered up by a handful of BDCs so far have also ranged quite widely: from (7%) to (30%).

The final results – once every BDC has reported – may see an ever wider dispersion.

 

Starting Point

Even then, IQ 2020 book values are unlikely to be the lowest point for many BDCs as the bad news on credit continues to build over three weeks into the second quarter.

By the time all is said and done – potentially in early 2021 – the percentage loss of BDC capital may equal or exceed that (42%) drop we’ve experienced in the BDCS value since February 20.

That would be shocking, but plausible given the BDC price haircuts we’ve witnessed.

 

Unrealistic?

Both the BDC Reporter and investors in the sector are holding out great hope to learn a great deal more once earnings season starts to unroll.

Unfortunately, we are likely to be disappointed.

Yes, there will be plenty of new facts and figures; a great number of portfolio company write-downs and many reassurances offered.

 

Look How Far We’ve Not Gone

However, there’s no escaping that the current crisis came out of a clear blue sky – with the BDC sector and the markets generally at a high – just two months ago.

More than that, many companies and lenders did not fully begin to adjust to the new situation till mid-March.

The BDC Reporter itself did not write it’s seminal article entitled “BDC Sector: Where We Stand And Where We’re Headed” till March 18, when we signaled that everything had changed.

The ratings groups have been busy re-grading as much as half all non-investment grade companies, a process that continues to right now.

As we all know, any material amounts of Payroll Protection Program (PPP) monies did not arrive till this last week.

In any case, only a fraction of BDC portfolio companies will gain any benefit therefrom.

We still await a final roll-out of the Main Street Lending Program, which now seems won’t be helping the deserving few till middle or late May.

 

Rhetorical Outburst

How many companies, whether leveraged or not, can survive with little or no income – but with plenty of costs – for three months without bursting at the seams?

Outside of the largest, cash rich multinationals, there are very few.

 

Wide Swathe

Even those companies that can avoid a trip to bankruptcy court or a major restructuring – which is the financial equivalent of major surgery – will be needing to re-think and re-position themselves.

That thudding sound you hear is thousands of 2020 business plans being thrown out of the window.

So, it would be unrealistic to expect that in early May, with just over a month of the impact of the crisis baked into first quarter results and with uncertainty continuing, that we’ll learn much that will be tangible.

 

Unconvinced

The BDC Reporter, at least, will be taking with a grain of salt any BDC projection of 2020 dividends; leverage levels or even liquidity plans.

At the risk of sounding like the Ancient Mariner, in the Great Recession, several quarters had to pass before every BDC, in turn, was able to determine what their particular challenges were and how to meet them.

Rarely was one Rights Offering or Revolver extension or issue of stock below NAV or manager fee waiver by itself sufficient to the task.

We expect that what we hear and learn about each BDC’s condition and strategy in April/May will look quite different a year from now.

However, we have to start somewhere and the IQ 2020 results will be that starting point.

 

Slowing Down 

This week, with those IQ 2020 revelations just around the corner, the pace of early revelations/previews by individual BDCs reduced.

When you’re a couple of weeks from reporting formally, why bother with informal previews?

There were three exceptions to the general rule this week, all analyzed on these pages.

 

Required Revelation

THL Credit (TCRD) was needing to issue new shares to its current and former managers in return for a pre-planned $30mn equity infusion and was thus required to make and reveal a book value update.

The new manager – First Eagle – provided other information besides but left much unsaid including by how much the regular dividend might be cut and what was happening to the BDC’s several troubled credits.

There was some update on a new loss at portfolio company OEM Group.

 

Missing

No word,though,  as to what had gone awry there and nothing said about other perennial credit question marks such as Loadmaster Derrick and Holland Intermediate.

Those 3 names alone account for investments at fair value equal to more than a quarter of TCRD’s book value outside of what’s invested in the off balance sheet the Logan JV – itself in some sort of trouble that will need further clarifying.

Still, that $30mn infusion – more than the revelation that book value will be dropping (30%) seemed to stabilize TCRD’s stock price, which closed Friday at $3.2, up slightly on the week.

 

Two More

Also offering up previews were Goldman Sachs BDC (GSBD) and TCG BDC (CGBD).

Both BDCs with famous parents had “not bad as expected” numbers to offer up, and investors lapped it up, pushing their stock prices up sharply.

 

Crickets

This trio’s revelations notwithstanding, a great number of BDCs have continued to communicate not at all with their shareholders since the beginning of the crisis.

That’s left everyone playing a guessing game and may result in above average price volatility in either direction when the official filings come out.

Frankly, we were expecting to hear much more from the 45 BDCs we track and had promised to update our article where we list all post Covid-19 developments daily to keep up with the influx.

In fact, the news flow has been so meager that we’ve not needed to post an update since April 21.

We will be publishing one last iteration going into the coming BDC earnings season and be done.

 

Useful Tool

We’ve also updated the BDC Earnings Calendar, which can be found in the Subscriber Tools section if you want to see when your favorite BDC will be reporting earnings and holding a conference call.

Also included is a link to the announcement which provides all the call-in details for those who want to listen to every word in real-time.

 

Regular Fixture

In the past, the BDC Reporter has listened to some conference calls live and been happy to wait around for the transcript of others.

This quarter we’ll be trying to attend each conference call.

Look for our immediate reaction and highlighting of major developments on the BDC News Feed and on Twitter.

We’ll try to expand and polish our findings on each BDC’s revelations – including reviewing the earnings release and quarterly filing – in follow-up articles within a few hours.

There will a lot of ground to cover but we’ll be mostly focused on what immediate liquidity challenges look like and – with an eye on the future – how many new underperforming portfolio companies emerge.

 

Useful Research

The BDC Credit Reporter will shortly be going behind a paywall, but till that happens check in there regularly for a long list of the new troubled credits we expect to be writing about.

Judging by what we’re seeing in the broader leveraged loan space we wouldn’t be surprised if over 1,000 BDC-financed non investment grade companies in all come out of this quarter’s results with an underperforming rating of some sort – 25% or so of the total.

Like Moody’s and S&P – but with one twentieth of the resources – we’re overwhelmed by the surge of downgrades that we’ve had to process already.

 

Window

So far – many BDCs have not yet set earnings release dates – the IQ 2020 earnings season will occur over the three coming weeks.

This coming week there are 4 BDCs on the docket: OXSQ, HRZN, FDUS and BBDC.

Most of these names have not been very forthcoming in the run-up to this reporting, so we’ll hold back on any predictions.

However, a glance at the BDC Credit Reporter’s BDC-by-BDC search function will show articles about 7 different BBDC portfolio companies have been penned since the crisis began.

There’s been less new content for HRZN (1), OXSQ (1) and FDUS (0), but that reflects as much the availability of information about portfolio companies as anything else.

 

Bean Counting

By the way, we’ll also be taking a hard look at variations in valuation techniques used by different BDCs over the earnings season.

With so many BDCs at risk of breaking through regulatory and bank requirements on leverage there’s a natural temptation by BDC managers to pull their valuation punches.

One of the best ways to evaluate that potential situation is to use Advantage Data to compare the different discounts BDCs apply on the same debt or equity positions held.

We’ll also compare how assets have been valued against what we’ve heard from ratings groups and the public record more generally and let readers decide for themselves which BDCs are being “conservative” and which something less so.

 

Trust And Verify

BDC asset values – always more an art than a science – may become a controversial subject this quarter and in the ones that follow.

It’s a very important subject and will determine the sector’s credibility with its lenders and investors for a long time to come.

We have great faith that most BDC managers will take a deep breath and let the valuations be what they are, but a minority of players may feel they have little choice  but to see the glass half full.

 

Big Deal. Till The Next Big Deal. 

All in all, this should be the most important BDC earnings season in many, many years.

That record will hold till IIQ 2020 which should be even more seminal, but we’re getting ahead of ourselves.


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