BDC Common Stocks Market Recap: Week Ended April 30, 2021

Undisturbed

The first week of BDC earnings season – and the end of the month – did nothing to disturb the BDC common stock price rally.

As we dutifully pointed out almost every day in the BDC Market Agenda through the week, the S&P BDC index – using a “total return” – kept climbing to new YTD, 1 year and all-time highs.

At the end of the week, that index was at 292.59, up 0.6% for the week, but slightly below the intra-week high of 294.58, set at the Thursday close.

Apparently there was some month-end profit-taking, with the index and BDCZ down (0.9%) on the last day.

Ever More

Still, the rest of the metrics we use to measure market enthusiasms remained strong at month’s end.

Over the week, 28 of 43 BDCs increased in price and 15 dropped : a healthy 2:1 ratio.

Moreover, some 6 BDCs were up in price by 3.0% or more over the week, and only 1 dropped by (3%) or more.

Tops

Leading the pack was Horizon Technology (HRZN) – which we’ve written about a great deal of late – up 4.62%.

Investors seem to have been reassured by the BDC’s IQ 2021 earnings release; it’s almost trouble free credit portfolio and prospectively higher earnings level going forward.

The BDC ended at $16.54, but had reached $17.28 intra-day earlier in the week.

At the Friday closing price, HRZN trades at a 49% premium to book value and 13.1x its projected 2021 earnings.

The chart below illustrates that HRZN has never been more in demand, recently at an all-time high despite having paid an unchanged dividend for the last 5 years.

Better Than Ever Before

At its highest point of $17.56 in 2021, HRZN traded 30% higher than at its pre-pandemic apex, even though NAV Per Share has subsequently dropped (7%), mostly due to substantial realized losses.

YTD HRZN’s stock price has increased 25%,  even though the analyst consensus is for recurring earnings to improve just 5.6% in 2022 versus 2021.

Object Lesson

We use HRZN to illustrate our not-very-controversial contention that many BDCs are trading for valuations never seen before.

Presumably this has to do with some combination of the low interest rate environment and an expected economic environment with minimal credit  losses and insatiable borrower demand.

A Different Example

Also up in price this week was BlackRock Capital Investment (BKCC) – up 3.5%.

Thankfully, the BDC broke its string of disastrous results and made a successful pitch to investors that there are better days ahead.

As we’ve mentioned before, BKCC’s external manager is projecting that recurring earnings, which dropped (40%) this quarter, will return to the level of its $0.40 annual distribution.

The BDC at a closing price of $3.89 trades only (11%) below book value and 13.0x its projected 2021 earnings and a massive 16.2x multiple of this quarter’s performance annualized…

While we wish BKCC the best – and are agnostic about whether its earnings goal is achievable till we undertake an in-depth look at the portfolio and run some numbers – this is another sign of a “red hot” market.

Since the beginning of the BDC rally – which we tag as beginning close to Halloween last year – the BDC’s price is up 62%, even as EPS has dropped and the dividend paid largely in stock. for a period.

NAV Per Share – even with this quarter’s positive result (+2.8%) – is (31%) below the level at the end of 2019.

More Data Points

YTD 2021 all but one BDC is up in price and over a 12 month period 41 of 43.

As of Friday, 32 BDCs are trading within 5% of their 52 week highs and 40 within 10%.

16 of 43 (i.e. over a third) are trading at a premium to book value.

Finally – and maybe most impressive of all – BDCZ has been outperforming the S&P 500 index all year:

Longer Term Perspective

At the risk of being called a wet blanket, this is unlikely to continue.

We offer up a 5 year comparison of the two indices, and you see what longer term performance looks like:

In our minds it’s a matter not of “if” but of “when”.

BDC investors should enjoy the ride but be prepared – based on prior experience – for a short, sharp downward adjustment when the time comes.

Coming Attractions

In the interim, we have week two of BDC earnings season to look forward to.

At least 20 players – or about half the public BDC universe – will be posting their results.

See the BDC Earnings Table.

There’ll be plenty of interesting developments even though – according to analyst estimates – EPS will be within 1 or 2 cents from last quarter.

Needles

The BDC Reporter will be looking for – and commenting on – the biggest surprises we can identify in the avalanche of new data.

Any new non accruals will be an anomaly, judging by the clean sheets of the 5 BDCs that have already reported.

Likewise, in an environment where asset values have consistently headed upward, any drop in NAV Per Share will be noted.

Whatcha Gonna Do ?

We also expect to hear different approaches to how some BDCs will cope with their undistributed taxable income now the pandemic emergency has passed, which caused earnings hoarding to occur.

This week we witnessed two different approaches from two large cap BDCs with a similar amount per share of undistributed earnings: Ares Capital (ARCC) and Hercules Capital (HTGC).

The former continues to hold on to shareholder earnings for the greater good and to be able to smooth its payout as long as possible.

The latter maintained its regular dividend but also announced 4 significant  “special” distributions of $0.07 each over the next 12 months.

That suggests total distributions at HTGC will amount to $1.5600 in the next twelve months, versus $1.3194 in 2019 and $1.3800 in 2020.

By contrast, if ARCC sticks to paying only its  regular dividend,  total distributions will be $1.6000, equal to 2020’s level and down from $1.6800 in 2019, a (5%) drop.

Yet, between the IQ 2019 and IQ 2021, ARCC’s external manager has increased its own compensation (management and incentive fees) by 7% – all of which appears to have been paid out.

By the way, both BDCs boasted of record liquidity at the end of March 2021, begging the question of what is enough ?

As you can see, dividend policies make a difference to real-life shareholder returns and deserve a spotlight shone on them.