BDC Common Stocks Market Recap: Week Ended April 9, 2021

Week Fourteen

Amazing

This was a remarkable week for BDC common stock prices, but if you just went by how BDCZ closed on Friday April 9, 2021 you’d not have thought so.

(For newcomers to this column, BDCZ is the ticker of the UBS Exchange Traded Note that owns most of the public common stocks in the sector and that we use as one of our price guides).

BDCZ closed at $18.87, just 0.11% over the week before.

However, there was a lot more going on under the hood.

The S&P BDC index – which calculates a “total return” – was up to 289.22, or 3.4% in five business days.

That was a 2021 YTD high and an all-time high for the index.

YTD the index is up 23.92% and on an annual basis over a 10 year period 7.18%.

Getting High

However, what we found most impressive were two other data points:

First, 24 of the 43 BDCs we track reached new 52 week high prices this week, months into this long running rally.

Second, 37 BDCs are now trading within 5% of their 52 week highs.

We’ve been tracking that last statistic since 2018 in a worksheet that we use to prepare these recaps.

Looking back, we’ve never found a week with so many BDCs trading near their 52 week apex.

Increased

Furthermore, the number of BDCs trading above book value is now 17.

That’s not the highest we’ve ever recorded, but is getting there and is 2 more than the week before.

In the Black

This week 41 of 43 BDCs were up in price.

Of the 41, a whopping 28 moved up 3.0% or more – the highest number in ten weeks.

Some of the weekly percentage price gains were impressive, albeit led by smaller BDCs prone to wild changes in value.

Isn’t It Ironic ?

Top of the heap this week was one of the worst performers from a fundamental standpoint in 2020: BlackRock Capital Investment (BKCC).

BKCC was up 9.20%, and has gained 41.3% in 2021 alone.

Second was Portman Ridge Financial (PTMN), up 8.3%.

As readers know, PTMN is just about to swallow up Harvest Capital (HCAP).

Third was Oxford Square Capital (OXSQ), which moved up 8.1%.

Last week – as chronicled in this column – OXSQ was the Biggest Loser.

The OXSQ story reflects the unnerving volatility of BDC investing and the difficulty in handicapping short term individual stock price moves.

On The Sidelines

Left out of the party this week were just two BDCs:

The worst performer was Great Elm Capital (GECC): off (6.3%).

In the same way that there was no pertinent news we could point to when GECC recently moved up sharply, there was nothing in the public record to explain this decline.

Also zagging when everyone else was zigging was Saratoga Investment (SAR): down (2.2%).

That’s a very different story than at GECC as SAR has been an investor favorite of late, recently reaching a 52 week high very close to book value.

Left Out List

Overall, we’d say that out of the entire public BDC universe and looking beyond just this week, only 4 BDCs have been left behind in this wave of investor enthusiasm.

The Forgotten Four include GECC, down (8.6%) YTD but – curiously – trading only (5%) off book value.

On the other hand, GECC did lose (60%) of its net book value per share between 2019 and 2020 thanks to credit write-downs and a dilutive Rights Offering.

Then’s there PhenixFin (PFX), which is not paying a dividend and is trading at 64% of book value.

As with GECC, PFX’s market capitalization is tiny and there is a lack of clarity about the way forward, keeping investors from embracing the BDCs involved.

Also trading at a significant discount to book value (28%) is Investcorp Credit Management BDC (ICMB).

Still, some investors remain hopeful, pushing up the stock price 19% in 2021.

Many questions remain where ICMB is concerned but with a big name manager and plans for sticking around, the BDC remains in contention.

Finally, there’s Capitala Finance (CPTA) – which is also not paying a dividend – and trades at a (60%) discount to net book value.

Management claims to be trying to pay off its SBIC debt as quickly as possible in order to obtain a new SBIC license…

Whether that’s a viable strategy or a pipe dream we’re unable to say but with every passing quarter we get closer to some sort of resolution.

Not Alone

As we’ve said before – when looking forward into 2021 and 2022 – there seem to be a far greater number of BDCs than 4 unlikely to be able to maintain (or even make) their distributions.

The BDC Reporter continues to count 9 BDCs likely to cut their payouts and 17 whose best case is keeping the dividend unchanged.

However, this is no time to “fight the tape” as the market seems to see only sunny skies ahead and who are we to rain on this parade ?

Reading The Tea Leaves

We will be very interested, though, in the trends that might emerge from the upcoming IQ 2021 BDC earnings season, which begins in late April.

No major developments are expected (although we could be surprised) but we’ll get a sense of how the narrowing of new loan spreads; the refinancing boom and left over credit challenges will affect the sector.

There are also a large number of BDCs that did not cut their distributions when LIBOR dropped in early 2020 who are not “covering” their dividend from earnings,or doing so only thanks to major fee waivers that are unlikely to be sustained.

Will these BDCs find a way to boost earnings sufficiently to keep their payouts unchanged once the artificial props are removed or will they need to be realistic about their economics ?

We’re about three weeks away from getting some answers to these and similar questions.