BDC Common Stocks Market Recap: Week Ended December 11, 2020Posted on December 14, 2020
BDC COMMON STOCKS
All Good Things…
After five weeks of increasing prices, the BDC sector finally took a breather this week.
BDCS – that UBS Exchange Traded Note which owns virtually every BDC stock – was unchanged in the period, closing again at $15.23.
The Wells Fargo BDC Scorecard Weighted Index – which we use to measure “total return” – dropped (1.84%).
(By the way, the S&P 500 – also pushing northwards for weeks – fell (1.0%) this week as well).
On the individual BDC front 11 increased in price this week, but 34 fell.
Of the BDCs in the red, 11 dropped (3.0%) or more, as price volatility continues to be high as investors cannot seem to decide themselves.
After buying up essentially any BDC however weak its fundamental performance, there was the beginning of a re-think.
The three top price losers – Investcorp Credit Management BDC (ICMB); BlackRock Investment (BKCC) and First Eagle Alternative Credit (FCRD) – have also some of the less enviable track records.
The BDCs mentioned were down (12%), (7%) and (6%) respectively.
Also in the news this week on December 10, 2020 was a downgrade by JP Morgan of Ares Capital (ARCC), based on the concept that the market leader was over-valued.
According to Seeking Alpha, the JP Morgan analyst warned:
Portfolios with “out-sized non-accruals, non-income producing equity allocations, and cyclical industry exposure will face headwinds to multiple expansion, while others without these specific headwinds are positioned to benefit from multiple expansion,” Wedel wrote in a note to clients.
ARCC was priced on December 4 at $17.28 and closed this week at $16.98, a modest (1.7%) blow.
On the upside, far and away the biggest mover was the sector’s smallest name: Harvest Capital (HCAP).
This week HCAP was up 17.9% to $6.99.
The two analysts who cover this micro-BDC project Net Investment Income Per Share (NIIPS) will be $0.06 in the current quarter and $0.30 in all of 2021.
For context, this last quarter saw NIIPS reach $0.14 and is $0.34 in the nine months YTD.
HCAP is priced at 69% of net book value.
Since November 20, 2020 HCAP has shot up from $3.01 to as high as $7.53 – a 150% gain.
Even by the volatile standards of the BDC sector that’s a shocking surge.
What makes this even more intriguing is that HCAP is far from out of the woods.
By the BDC’s own rating system $48.3mn of portfolio assets – half of the total – are underperforming.
That includes 4 companies and $19mn non performing.
We’re guessing that either HCAP has become a speculators favorite play or there’s a belief amongst some investors something is about to happen from an M&A perspective.
Of course, there is that $0.16 dividend that was due in the spring being paid out this month (ex-dividend December 15) which has been stirring the pot as well.
Whether HCAP will be in a position to continue paying much of a dividend going forward does not seem to concern its recent buyers.
On a price to projected earnings basis HCAP has traded as high as 25.1x based on those 2021 numbers we mentioned above.
That makes HCAP – by that metric – the sector’s favorite BDC stock…
We’ll be very interested to see what happens next to HCAP and hope that no hearts will be broken.
What Else ?
News-wise, this week was notable because at the very last minute Medley Capital (MCC) reported its results.
We’ve already written a review of the BDC’s lacklustre performance, so we won’t rehash here.
This does mean IIIQ 2020 BDC earnings season is over and the BDC Reporter can start to sum up what we’ve learned and what the future might look like.
Otherwise, if we seek a common thread for this week , most of the important news has been in BDC liability management.
Several BDCs have raised new unsecured debt or amended their secured facilities.
We’ll take a deeper look when we turn to the BDC Fixed Income Market Recap shortly.
Running Out Of Runway
There are only two full weeks left in this miserable year and thirteen business days.
Chances are very low BDCS – which remains (26%) behind the December 31, 2019 level – is going to break into the black.
BDC investors will have to content themselves with the knowledge that BDCS dropped as low as $8.50 (albeit for a nano second) and is now at $15.30.
We take more comfort from the status of the Wells Fargo BDC Scorecard Weighted Index, which is only (5.3%) in the red YTD.
At its worst, the index was (54%) below the year end 2019 level in March.
Could the index poke its way into the black for 2020 ?
We’ll need another burst of the rally and not the more likely year-end profit taking.
(Keeping BDC investors humble is the knowledge that S&P 500 investors – briefly caught in a pit of despair – are up 13.3% in price alone YTD).
The BDC Reporter will keep tracking all the numbers right through to year-end and will review the final results at the beginning of 2021.
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