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BDC Common Stocks Market Recap: Week Ended August 27, 2021

Posted on August 30, 2021
BDCs: Multiple


Week Thirty Four

Bounce Back

The major indices – and the BDC common stock sector – shook off multiple concerns about the future and came bounding back this week.

The S&P 500 and NASDAQ both closed at all-time highs.

Apparently investors were initially worried that the Fed would be raising rates sooner than previously mooted, but then were reassured otherwise.

As a result, BDCZ – the UBS Exchange Traded Note which owns most of the public BDC stocks – joined in the general merriment, increasing in price 4 days out of 5.

BDCZ closed Friday at $19.75, a 1.80% increase for the week and making up three-quarters of the prior week’s drop.

The Wilshire BDC Index – using the “total return” calculation – went up 1.87%.

This index is not quite at its highest point in 2021 – which occurred on 8/16/2021 – but is only (0.3%) off.


So Different

Looking at how individual stocks performed, the contrast between this week and the week before could not be higher.

In the week ended August 20, 2021 not a single BDC closed the period with a higher price.

This week, 36 of the 41 BDCs we track were up in price.

Of the 36, 4 increased 3.0% or more.


Hike !

We were impressed by the price action at Saratoga Investment (SAR), which increased 9.05%.

SAR was one of two BDCs – along with Oaktree Specialty Lending (OCSL) – which reached a new 52 week high this week.

In fact, SAR’s intra-day price of $29.16 is the highest level the BDC has ever reached under its current investment advisor.

The spike in SAR’s price was all about the unexpected decision by said advisor to boost the quarterly dividend to $0.52 from $0.44 previously.

That’s an 18.2% distribution boost.

Previously, the BDC seemed committed to a gradual 1 cent a quarter hike.

SAR had four of those in the rear view mirror before this latest payout increase.


Primordial Payouts

This was another reminder that investors look principally to the dividend to value BDC stocks.

(BTW, SAR is currently trading at 13.9x the latest dividend annualized – one of the highest in the sector).

Likewise – when Newtek Business Services (NEWT) announced its intention to become a bank holding company, it was the expected drop in the distribution that caused the stock to drop (30%) in a few hours.

However, NEWT has attracted new investors since its historic announcement, which caused the BDC to increase 5.0% this week – the second highest percentage gain.

NEWT now trades at $28.76, 19.5% higher than its intra-day lowest point after the news broke of management’s decision to give up being a BDC some time next year.


Drop Down

The biggest loser in price percentage terms was Investcorp Credit Management (ICMB).

As daily readers will know, the tiny BDC which used to be CM Finance and is headed by the same team, announced preliminary quarterly and full year results this week.

In this case there was no dividend cut announced, but NAV Per Share fell (12.7%).

Even a cursory glance at the BDC:NAV Change Table shows that was the largest percentage drop recorded in the BDC sector this quarter, and by a substantial margin.

Since the end of 2019, ICMB’s NAV Per Share has dropped (32%) – the second worst record in the sector after Great Elm (GECC).

Not surprisingly, shareholders punished the stock which was down (12.6%) this week, closing at $5.44, but reaching $5.13 intra-day.

Apparently investors were surprised by ICMB’s loss of value.

As we’ve explained in the Daily Update, we’re surprised that the market was surprised, as the writing was on the wall about the two portfolio companies  that seem to have contributed to the valuation drop.

Nonetheless, the total volume of ICMB’s shares traded went from 7,000 on August 25 before the announcement to 397,200 the next day when the price dropped (13.0%) !

Investors like to get ahead of the news, but in this case the sellers were too late and a price rout ensued.

Ironically, ICMB has not yet reported official results. These were preliminary numbers.

We’ll be interested to see how the markets price ICMB before and after the scheduled September 14, 2021 conference call.

At the moment, the price to dividend is 9.1x, suggesting investors believe this drop in NAV Per Share foretells a lower distribution (currently $0.60 annually in regular payouts) down the road.

If management can convince investors that the worst is passed and the impact of these write-downs will not affect future earnings and the dividend, ICMB’s price could climb.

On the other hand – and despite the big price hit taken (and depending on the numbers involved) – if ICMB’s dividend does get cut, further price erosion is possible.

We’ll have to wait a few weeks for this all to settle down.


Looking Forward

There are just 2 days left in the month.

At this point, BDCZ is up 2.1% for August.

Given the way prices are moving of late – sharply up and down in either direction – we won’t presume the BDC sector will end the month in the black.

Nonetheless, whatever happens in the next couple of days, the sector remains very strong from a price standpoint.

BDCZ is up 21.7% YTD. The BDC Wilshire Index “total return” is a positive 32.9%.

23 BDCs are trading within 5% of their 52 week highs and 35 are within 10%.

Every BDC we track is currently beating its 200 day moving average price.

Nearly half (20) BDCs are trading at a premium to book value, and 16 BDCs are reporting higher net asset value per share than at the end of 2019.

Over the YTD and 52 week time frames 40 BDCs are up in price.

We currently project that 14 BDCs – about one third – will payout higher distributions in 2021 than 2020.

The BDC Reporter’s estimates that as many as 17 BDCs will increase their total distributions in 2022 over the current 2021 level.

There may be occasional disappointments as we experienced with ICMB this week, but the fundamentals sector-wide are for continuing improvements.


Step Up

What we’ll be interested to see if the weeks ahead – should the markets remain strong – is whether BDCZ will reach new heights.

BDCZ needs only increase 2.8% to achieve a new 52 week high or move up 3.1% to exceed the level reached just before the pandemic.

We continue to be bullish in this regard – and notwithstanding that we’ve been in rally mode since late March 2020.


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