BDC Common Stocks Market Recap: Week Ended August 14, 2020

BDC COMMON STOCKS

Almost Done

There are only two BDCs that have not reported results for the second quarter of 2020.

Essentially – after a flurry of releases on Monday August 10 – BDC earnings season is essentially done.

(Sorry Prospect Capital and Investcorp Credit Management).

The sector as a whole – measured by BDCS – moved up 0.84%.

Upward

There were several major individual stock movers during the week, all in an upward direction and each tell a story.

The Biggest Mover was MVC Capital (MVC) – up 18.9% on the surprise “merger” offer from Barings BDC (BBDC).

MVC closed the week at $7.88.

Given that the generous offer – in the BDC Reporter’s estimation – by BBDC is payable principally in the acquiring BDC’s stock, expect price fluctuations as the closing date approaches.

We’ll be undertaking a full review of this significant acquisition, expected to close in the IVQ, when we’ve digested the Proxy.

BBDC’s own stock did not see anywhere near as much activity, closing the week up 0.24%.

Unexpected

Also up in price considerably was Great Elm Corporation (GECC) – by 14.0%.

That might seem surprising given that the small-cap BDC reported very poor IIQ 2020 results.

Net Investment Income Per Share dropped by two-thirds in the second quarter to $0.09; way below the $0.25 quarterly dividend.

That quarterly distribution is being paid only 10% in cash as GECC seeks to protect its liquidity position.

Furthermore – and with little explanation – management has indicated its business strategy is set to change drastically.

Focus Switch

Instead of trading in and out of loans and bonds in the secondary market – as the BDC has done since taking over Full Circle Capital – their future focus will be on owning small financial service companies.

So far GECC only has one  – modestly successful – financial business investment but wants to add more in the future.

Typically, sudden changes of direction; declining profitability and liquidity constraints are reflected in a lower stock price.

Not this week and not for GECC, which now trades above book value – one of only 9 BDCs in that category.

Suspicion

The BDC Reporter suspects the sudden popularity of GECC – which was trading at $3.84 just a month ago but closed at $5.20 – 35% higher- may be fleeting.

On Friday after the close the BDC filed another amendment to a draft Prospectus for a non-transferable Rights Offering.

We may see GECC in the week ahead tapping its shareholders for additional capital to fund its change of strategy.

If past is prologue, that may bring GECC’s stock price down to earth, but the details of the transaction are still unknown.

If something does happen, we’ll be covering the story on the BDC Reporter.

Above And Beyond

Also up in price this week was WhiteHorse Finance (WHF) which moved up 8.7%.

The reason here was more prosaic: the BDC reported results above investor expectations.

Most notably – as a glance at the BDC Data Table shows – NAV Per Share increased by 5.4%.

Stalwart

Even more exciting for WHF’s shareholders, the BDC did not decrease its $0.355 quarterly distribution in the second quarter.

Many investors had expected – given that recurring earnings are below the payout level and by a wide margin – that might occur.

Management – without committing itself – is suggesting that WHF should continue to pay an unchanged distribution going forward.

That was all the market needed to push up the BDC’s stock price.

Warm Feeling

Overall, BDC investors have been pleased with the results of IIQ 2020 earnings.

We keep track of every BDC’s stock price just before the earnings release and compare against the price as of Friday’s close.

Broadly speaking, two-thirds of BDC stocks have risen in price since their second quarter reveal.

Unexpected

Leaving aside MVC for obvious reasons, some of the upward moves have been very high, indicating investors were both surprised and pleased.

Take for example, BlackRock Investment (BKCC), which is up 30% since reporting results.

Certainly, the second quarter’s metrics at BKCC were nothing to write home about.

NAV Per Share dropped sharply by (9.5%) and for a fifth quarter in a row.

Net Investment Income was down as well.

Contrarian

The BDC continues to pay 80% of its just reduced dividend in the form of stock.

All that notwithstanding investors have been lining up to own the stock.

Our surmise is that either investors believe the long promised turnaround at BKCC is about to occur or that parent BlackRock is “going to do something”.

Regarding the latter, we have nothing to offer but the long held belief that BKCC might be merged at book value into BlackRock TCP Capital (TCPC).

Ongoing

As to the former, the BDC Credit Reporter’s initial review of BKCC’s portfolio suggests there are several problematic borrowers on the books.

Chances remain high that BKCC’s inexorably dropping NAV Per Share – down (38.2%) since IVQ 2017 – will continue.

Trio

Also up 20% or more in price since reporting results are Fidus Investment (FDUS); OFS Capital (OFS) and Saratoga Investment (SAR).

Perhaps not coincidentally all are lower or middle market focused BDCs – a group that investors have been very uncertain about since Covid-19 began.

Even the BDCs themselves – like SAR which pro-actively suspended paying a distribution for a quarter or FDUS which reduced its dividend in advance of its results – were jumpy.

Not surprisingly that translated through to the investor base.

Now, though, market enthusiasm is picking up, but from a low base.

Bottom Of The Pile

On the downside, the BDCs who have seen the greatest leakage in their stock price since reporting results have been – as one might expect – those with unflattering performance.

The three Biggest Losers in this regard are Garrison Capital (7.1%); Capitala Finance (6.3%) and FS-KKR Capital (5.4%).

Apparently the shareholders of these three long-time underperforming BDCs do not believe the cavalry is coming or that a turnaround is underway.

This despite the fact that – in the case of GARS – a merger with Portman Ridge Financial (PTMN) is planned shortly.

Bigger Picture

Truth be told – and despite some very encouraging results from several BDCs as we’ve shown – the BDC Reporter still rates the long term outlook for 12 BDCs as being POOR.

That means we worry that these players financial performance causes us to doubt their long term viability as an independent entity.

We still believe that these BDCs – listed in the BDC Data Table for anyone interested – may not be with us for much longer in their current form.

All this points to a shrinking of the pool of BDC players from the current 46 even as total BDC sector assets under management seem poised to grow.

We wouldn’t be surprised to see the number of public BDCs to be in the high 30’s by the end of 2021.

Right Now

The most immediate question marks are over the fates of Harvest Capital (HCAP); Medley Capital (MCC)  and Capitala Finance (CPTA).

None of these BDCs has secured financing in place; all  have unsecured debt to repay shortly and none are paying a dividend.

If those are not the attributes of a “zombie” BDC, then we don’t know what are.

Shareholders at all three BDCs deserve some sort of resolution, but none are promised by the Boards and external managers involved.

Future Feature

We’ll undertake a more comprehensive review of IIQ 2020 results once we hear from the last two holdouts.

It’s been a time of remarkable changes and of many surprises and deserves the full BDC Reporter Featured Article treatment.

Looking Forward

We’ll also be watching to see – now that the BDC earnings cat is out of the bag and investors have had time to adjust to the slew of second quarter data – if prices keep moving up.

The BDC sector has moved up three weeks in a row.

At this point, the Wells Fargo BDC Index – which provides a Total Return calculation – is down (19.5%) on a 2020 YTD basis.

(BDCS is off -29.5%, but that’s only on price and does not take into account the three dividend collected in this time frame).

Unmatched

BDC shareholders will be jealously noticing that this week the S&P 500 returned – much to everyone’s surprise – to its year-end 2019 level.

We’re unlikely to see BDCS follow suit given that so many BDCs have reduced their dividends; earnings are down almost across the board as are expectations for the future.

In fact, given the damage of lower LIBOR; lower financing activity and of growing credit losses, BDC investors may consider themselves lucky to have fared as well as they have.

Almost A Prediction

With many “known unknowns” ahead in the economy – we wonder if BDC sector prices might not take a breather in the weeks ahead ?

That will almost certainly be the case if the broader indices take a step back.

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