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BDC Common Stocks Market Recap: Week Ended August 20, 2021

Posted on August 23, 2021
 
BDCs: Multiple

BDC COMMON STOCKS

Week Thirty Three

Tremblor

All the major indices had a difficult week, just after reaching new heights.

(There might be a connection between these two phenomena).

Despite a rally on Friday: “All three major stock indexes finished the week lower. The Dow dipped 1.1% this week, while the S&P 500 shed nearly 0.6% and the Nasdaq Composite moved 0.7% lower“.

As our daily readers know, the BDC sector was not spared – with prices knocked around like a shuttlecock in an Olympics badminton final.

Here’s a 5 day chart of BDCZ – the UBS Exchange Traded Note which owns most BDC stocks and which we use to measure sector price changes:

For the week, BDCZ was down (2.37%) – the biggest drawdown since the week ended June 18, 2021.

(That drop would have been a much more substantial ( 4.2%) if not for the Friday bounce back.

The Wilshire BDC Index – using the “total return” calculation – was down (2.40%) after reaching an all-time high the week before.

 

All Together Now

Most tellingly of all every single individual BDC we track dropped in price over the week period.

We’ve not had that sort of negative unanimity all year.

Overall, 14 BDCs were down by (3.0%) or more, the worst reading in that category since June 18, 2021.

(BTW, during the week ended June 18, BDCZ dropped (3.62%) only to recover in price for the fortnight that followed).

Furthermore – another reading we take every week –  the number of BDCs trading above book value – dropped sharply: from 19 to 13.

That’s the lowest number we’ve recorded since early March.

So, undoubtedly a tough week to be a BDC common stock investor.

 

Take A Deep Breath

However, if we take a step back, the numbers remind us that matters are not (yet?) so bad.

16 BDCs are still trading within 5% of their 52 week highs, and 35 are within 0%-10%.

No BDC is anywhere near a 52 week low, admittedly set during the pandemic in most cases.

If we compare prices in a 1 month time frame – which included a run-up before the latest freefall – 23 BDCS (a majority) are still in the black.

Once in a while, we look at the 50 and 200 day moving averages to help us gain perspective.

Over a 50 day period, 17 BDCs are still up in price and over 200 days 40. Out of 41.

For all of 2021, BDCZ is up 19.5% and the Wilshire BDC index 22.1%.

Both those results are better than what the S&P 500 – itself on a record run – has achieved this year.

Finally, BDCZ closed Friday only  (4.4%) below it’s 2021 YTD high set in mid-June.

 

Newer Normal

As we’ve mentioned in our daily reporting, the BDC sector has become accustomed in recent months to these sharp downward price jags.

There have been four since May alone, all followed (including this one) by a rebound of varying intensity.

Even at this stage – and despite all that red ink – BDCZ stands higher as of Friday than at the end of July.

 

Two Way Street

Which is all to say – despite the reported market concerns about the Covid-19 resurgence; the tapering off of Fed support; higher interest rates and (a new one) a “flash recession” – we could go either way in the weeks ahead.

We’re on the record as being optimistic about the prospects of BDCZ breaking out over the $20.29 52 week high, and remain so – this past week’s results notwithstanding.

There’s been plenty of selling but not the disorderly retreat that we’ve witnessed when investors have – for a time – turned their back on BDC investments before.

Still – both for the upside and downside scenarios that might play out – much depends on how investors read the tea leaves about the upcoming Jackson Hole Fed conclave (being held virtually).

Also, as CNBC reports:

“Besides the Fed, the week has a few economic reports. Existing home sales are released Monday; new home sales Tuesday and durable goods Wednesday. Friday has personal consumption expenditures data and the inflation index, closely watched by the Fed”.

As is always the case, BDC sector prices remain hostage to sentiment in the broader markets.

 

Not So Much

While investors were distracted by wild price swings, nothing much changed during the week regarding BDC fundamentals.

As we reported, Logan Ridge Finance (LRFC) announced results for the first time under new management and with a new strategy that requires much selling of existing assets.

Some of those sales have occurred but not enough to generate a profit, or a dividend announcement this quarter.

As this chart shows, LRFC’s stock price was down on the week, but no differently than everyone else.

 

[Insert BDC Reporter’s View Here]

For our part, we’ve made some calculations – as delineated in Monday’s BDC Market Update – and are not convinced that LRFC – at this size – has much hope of becoming materially profitable.

Unfortunately, management’s goals of de-leveraging and re-positioning the portfolio into safer, lower yielding assets could offset the benefits of re-investing non income producing assets into loans.

We’ll be happy to be proved wrong, but the process of shape shifting LRFC’s portfoli0 – already underway when Capitala was in charge – will take well into 2022 (or even beyond) before being fully completed.

Investors will have to wait some time to see if the new manager can achieve their ambitious plan.

 

Good Marketing

Otherwise – and summarizing our daily coverage of the BDC sector – we heard from several BDCs about new deals being booked – a routine reality.

There’s a small sub-set of BDC players who like to issue press releases about notable new deals and – sometimes – exits.

(For some reason, we rarely hear about realized losses).

We heard this week from Capital Southwest (CSWC); Main Street Capital (MAIN) and Horizon Technology Finance (HRZN).

 

Indebted

On the BDC Fixed Income front, BlackRock TCP Capital (TCPC) followed a well worn path and raised additional unsecured debt at a 2.875% yield.

That suggests the institutional debt markets remain open to the larger cap BDCs and interest rates achievable remain highly favorable.

Although many larger BDCs have already raised huge sums in this way, we expect more will follow throughout the year.

At this point, the famous “window” is wide open, which is good news for continually lowering the average cost of BDC debt capital and strengthening balance sheets with what is effectively “cov-lite” junior capital.

Moreover, the public unsecured debt market is staying busy as well, as reflected in Gladstone Investment’s (GAIN) new Baby Bond Bond GAINZ which began trading this week.

GAINZ is priced at 4.875%, and has a 7 year maturity.

The BDC will be paying (24%) less than on Term E Preferred GAINL, which GAINZ refinanced.

 

Object Lesson

LRFC, as well as PhenixFIN (PFX), must be watching carefully as both BDCs best hope of repaying their existing 3 public issues comes from the public debt market.

Great Elm Capital (GECC) was recently able to issue a new public Baby Bond, so we imagine that LRFC and PFX could do so as well, if management desires as much.

In the next few months, Fidus Investment (FDUS); OFS Capital (OFS); PennantPark Investment (PNNT) and WhiteHorse Finance (WHF) have Baby Bonds reaching their redeemable dates.

See the updated BDC Fixed Income Table.

We expect that these BDCs will have the option – which they’ll grab –  to raise institutional unsecured debt rather than go the public route.

Till recently, accessing institutional debt investors would have been unthinkable for these smaller players but there’s been a sea change in debt investors attitudes which is beneficial to the BDCs, but is shrinking the public Fixed Income market.

We’re on the fence about what Gladstone Capital (GLAD) might do and First Eagle Alternative Credit (FCRD), but refinancing in the public market is the most likely option.

The former’s existing Baby Bond (GLADL) is redeemable from November 2021 and the latter’s FCRW is slated for October 31, 2021.

The respective yields on the existing Baby Bonds are 5.3750% and 6.1250%.

In any case, we expect to have many updates to provide our readers on this important subject – which will provide lower costs and stability  for years to come – in the months ahead.

 


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