BDC Common Stocks Market Recap: Week Ended August 21, 2020Posted on August 24, 2020
BDC COMMON STOCKS
This was the first week in some time without any BDC IIQ 2020 earnings results being published.
(We are still waiting on Prospect Capital and Investcorp Credit Management – whose year end is in June – to round out “earnings season”).
Apparently, BDC investors were in a cautious mood after reviewing 44 fund results, which brought down prices.
BDCS – still our weathervane on price changes – was down (2.9%) on the week.
This at a time when the S&P 500 was in an exuberant mood – breaking new records and ending the week up 0.50%.
Of the 46 public BDCs we track, only 6 were unchanged or in the black price-wise.
That means a whopping 40 BDC stocks dropped in price during a week where there was very little in the way of market moving news.
In fact – as we illustrated in the BDC News Feed throughout the period – there were multiple “Target Price” upgrades by analysts in the period.
The non-comprehensive list – which we get from Refinitiv – affected Barings BDC (BBDC); Oaktree Specialty Lending (OCSL) and Sixth Street Specialty (TSLX).
[You’ll find these analyst recommendations in the BDC: News In Review article we’ve taken to publish at week’s end as a useful summary of everything that has happened].
Of the 40 BDC common stocks that went down in price, 22 dropped by (3.0%) or more.
Reversal Of Fortune
The BDC dropping the most in percentage terms was BlackRock Investment (BKCC), off by more than (10%) in five days.
Regular readers will remember that we wrote about BKCC last week when the stock was headed – inexplicably – in the other direction.
Nothing has happened in the interim in terms of the public record to justify BKCC’s loss of popularity.
In fact, we can’t find any new filing or press release since late July.
In the absence of any other information, we’ll just put this down to profit taking and the normal fluctuations that BDC securities are prone to.
This is no sector to invest in if you’re looking for stable, explicable stock pricing.
The volume of stocks being traded are too low and investor sentiments are too fickle for that to occur.
Anyway, also down in price substantially was PennantPark Investment (PNNT): (8.2%).
Again, no news this week but analysts and investors may be chewing over the implications of the BDC’s recently announced new joint venture.
This is called PennantPark Senior Loan Fund I, LLC (“PSLF”) and involves the following arrangement with new partner Pantheon, an asset management firm:
Pantheon has invested $35 million in capital to acquire a 28% stake from PNNT in a Special Purpose Vehicle that currently holds $356 million of senior loans at fair value. Additionally, Pantheon has the opportunity to contribute an additional $30 million of capital in PSLF over time.
The BDC Reporter has now read the initial press release and the IIQ 2020 PNNT conference call transcript where the JV is discussed.
(The 10-Q tells us little because this transaction occurred in August).
As far as we can tell, PNNT is lifting those $356mn in loans from its balance sheet and placing them in the JV.
The JV – in turn – will be funded by a new senior debt facility (details: TBD) of $245mn or so.
Pantheon and PNNT’s interest in the junior capital of the JV will be structured principally as subordinated debt and equity.
In the future the JV may be expanded in size as Pantheon has committed another $30mn, which PNNT will have to match for its 72% share one presumes.
In the short term, this transaction takes a lot of secured debt off PNNT’s balance sheet ($245mn), but also nearly half its first lien portfolio assets.
We would expect that income from the JV will be lower than from those same assets if they had been maintained on the balance sheet given – if for no other reason – that PNNT holds only a 72% stake in the proceeds.
The impetus for the JV seems to have been to de-leverage PNNT, which was pushing against its target limits.
In turn, that has been squeezing the BDC’s liquidity.
The 10-Q indicates availability under the two secured Revolvers which PNNT is financed by was only $62mn as of June 2020, a quarter of the availability at the end of its fiscal year in September 2020.
All in all, the market may not have been impressed by where PNNT is going.
We note that 2021 Net Investment Income Per Share is projected at $0.55, (15%) below the current running rate.
Back In The Red
The third biggest downward move in price was that of Apollo Investment (AINV): (7.8%).
Like BKCC, the troubled BDC’s stock jumped right after earnings were first released but investors have had second thoughts and the stock has been dropping.
AINV was as high as $10.01 but is now at $9.02.
Like BKCC and PNNT, AINV may have a long and storied history and have a well known manager, but also faces long term performance challenges.
All three names are essentially “turnarounds” and will continue to fluctuate widely in price until a satisfactory change is effected.
We’ve now been waiting for many years for that change to occur for all three BDCs.
Unfortunately, the pandemic makes a “turnaround” less likely and – even if achieved – that much further away than what we might have expected at year-end 2019.
Alone At The Top
On the plus side price-wise this week as the only BDC stock up in price significantly was Investcorp Credit Management (ICMB): by 6.5%.
That tells us more about how BDC investing works than ICMB itself.
ICMB won’t be reporting results till September 14.
Clearly some investors are bidding up the price after the stock reached a recent low of $3.02 on August 4th on the hope that the BDC will “surprise to the upside”.
At its Friday price of $3.43, ICMB is still trading at a (58%) discount to the March 2020 net book value.
We’re not very good at this type of “over-under” trading for the short term, so we’ll wait a few weeks to see how ICMB will perform.
Longer term, our outlook for the BDC is POOR, but maybe Investcorp can do what BlackRock, Apollo Global and PennantPark have not been able to do.
This is a good a time as any to step back and see where the BDC sector sits since Covid-19 (semi-)officially began February 2020.
The total return Wells Fargo BDC Scorecard Weighted Index closed this week at a reading of 1,110.31.
That’s down from 1,446.75 at the close on February 20, 2020, or a drop of (23.7%) in almost exactly 6 months.
YTD – for anyone who’s interested – is a very similar (21.7%) down.
So far every individual BDC stock is below its end of 2019 level.
The median loss of price is (31.0%).
As always we are struck by the wide range of results – even if all are in the red.
BDC stock prices have dropped from as little as (7.8%) to (76.3%). [We’re leaving out recent entrant FS -KKR Capital II or FSKR].
At this stage, it’s fair to say that the damage to BDC payouts has been pretty extensive, with 26 BDCs reducing, delaying or suspending their distributions, and/or paying the bulk in stock.
We’ve been mining the BDC Data Table and calculate that YTD BDC NAV Per Share has dropped (for the 44 players that have reported) by (15.7%).
That’s after this quarter’s 2.6% increase, so the numbers were worse at the end of the IQ as you’d imagine.
Not surprisingly, only two BDCs are trading at a price level less than (10%) away from their year-end 2019 prices.
Those “winners” are HRZN (7.7%) and OCSL (7.8%). The former has maintained its dividend and the latter has actually increased its payout.
No Good Deed…
However, other BDCs that have kept their regular dividends unchanged so far in 2020 (largely three quarters done when dividend announcements are concerned) are still sharply off price-wise.
Take for example Hercules Capital (HTGC), whose dividend is unchanged and whose projected 2021 earnings are stable.
HTGC’s stock price is – nonetheless – (21.2%) down in 2020.
There are many similar examples out there.
Investors may not be as darkly pessimistic as they were in late March but there’s a “Show Me” flavor to current market pricing.
While other stock indices may be showing no signs of being impacted the pandemic; the recession; massive unemployment; trade uncertainties; a divided country etc, the BDC sector seems more realistic.
What’s impossible to say at this point is whether – overall – the BDC sector is oversold, overbought or is just right.
There are just too many uncertainties up ahead – including credit telenovelas playing out at portfolio companies – to make such a call.
Ending With A Positive
We will stick our necks out, though, and say that the BDC sector – judging by its fundamental metrics and speaking in general terms – has held up far better than we might have expected under the conditions we’ve experienced of late.
By and large, the “better” players on the field before Covid-19 have performed creditably; the mid-performers have held their ground and the weaker BDCs have gotten worse.
In a strange way – and even with BDCS down almost a third on the year – it’s reassuring to see the BDC sector remain true to form in these once-in-a-generation conditions.
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