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BDC Common Stocks Market Recap: Week Ended December 13, 2019

Posted on December 16, 2019

BDC COMMON STOCKS

Never Too Late

The BDC sector – where prices are concerned – seems to be keeping the best for last.

Or, in other words, the sector has reached a 2019 height with just two weeks to go.

That’s the exact opposite of the same time last year when prices were hurtling to a post-recession low !

This week BDCS closed at $20.50, the highest price of the year, passing the heights of February.

That was achieved right at the close on Friday, and was up 1.3% over the week before.

Likewise, the Wells Fargo BDC Index was at a YTD high, up 1.9% on the week.

Piling On

This upward surge was reflected in the number of BDC issues up/unchanged in price on the week versus those down : 26 to 20.

Four individual BDCs were up 3.0% or more in the period as well.

Furthermore, the number of BDCs trading above book – a highly stable number of late – increased to 18 from 17.

So, there’s definitely something going on, but the same can be said of the major indices.

This week, the S&P 500 was up once again: by 1.9%.

In fact, all three major indices perked upwards.

Rally: ON

Technically, with the latest jump in the BDCS price, the sector is back in rally mode.

We count the beginning and end of price rallies by 5% sustained movement in one direction or the other.

BDCS is now up 6.2% since October 14, 2019.

It’s taken two months to get into “rally” numbers.

Different This Time

Back in late December of 2018 just a week passed for BDCS to increase by more than 5%.

Over the full two month period of the last rally, BDCS went up over 18%.

The current upward move is slower and not quite as broad based.

As of this week, 2 BDCs trade within 5% of their 52 week low and 17 within 5% of the high.

Back in February 2019 – at the last peak – there were none trading within the bottom 5% and 21 within 5% of the top.

Not The Same

We also compare every week how individual BDC stock prices are trading against the February 2019 peak.

This week – as you’d expect – the number is higher than last week but still underwhelming compared to 7 months ago.

Despite the late year surge in BDCS, only 17 individual BDCs  are currently trading higher than at February 22.

29 are trading below – despite all the hoopla and market froth.

Passing Phase ?

As we’ve suggested before, this “rally” may have more to do with short term, year end stock market factors than a deep abiding belief in BDC stocks.

The test will be seeing what happens in the first few weeks of January.

If price levels fall down, we may be able to surmise – barring some other major development – that some sort of seasonal boost has been underway of late.

Keeping Busy

From a news standpoint, this was an unusually busy week given most market participants are trimming their trees and ordering up egg nog.

As we noted in our Twitter Feed – effectively our real-time News Feed – we heard that the manager of THL Credit (TCRD) was being acquired by another asset manager behemoth.

We (almost) immediately wrote an article about the change from TH Lee to First Eagle Asset Management.

For TCRD’s shareholders – who get a vote on the subject but are unlikely to do anything but nod their heads – the most immediate impact will be a $40mn purchase of newly issued stock by First Eagle when the deal closes.

Meh

Shareholders don’t seem to have been particularly excited about the change, given that the stock price has not moved much this week.

That may be because First Eagle appears to be buying the THL Credit organization and keeping its senior managers.

As a result, it’s likely that the same individuals who’ve been guiding TCRD to date will be helming the BDC after the deal is closed.

Getting Together 

Then there was Goldman Sachs BDC’s (GSBD)  decision to acquire its own non-traded sister BDC.

As with TCRD, we covered the subject in great detail that we won’t repeat here.

What we can report is that investors appear to have been delighted by the prospect of a bigger GSBD.

As the chart below shows, the stock price jumped up over 6% in the days following the announcement:

So Long. Farewell.

Elsewhere, OHA Investment (OHAI) shareholders approved its merger into not-so-much bigger Portman Ridge Financial (PTMN).

That’s been on the cards for weeks and never in doubt.

The most notable aspect of the transaction is that we’ll be losing a public BDC – albeit the smallest one – bringing the universe of public funds we track to 45.

Investment Outcomes: Sweet And Sour

We continue to bring to readers attention highlights from what we’re publishing on the BDC Credit Reporter about what’s happening to under-performing BDC portfolio companies.

Notable this week was a Monroe Capital (MRCC) borrower that saw a senior employee indicted by the government for working with New York mobsters on a real estate project.

Barings BDC (BBDC) is the only BDC lender to the parent company of Men’s Wearhouse, which reported weaker results this week.

Two public BDCs have exposure to Team Health, which we’ve belatedly added to the ranks of under-performing portfolio companies. Those are BBDC and FS-KKR Capital (FSK).

We used the opportunity to convey our heightened concern about a spate of weaker credits in certain segments of the healthcare sector.

(Not) Keeping On Trucking

We’ve also been noting – for several months now – that the trucking sector is facing multiple credit challenges, with a great deal of companies getting into trouble.

On our Twitter News Feed, we relayed this confirmatory quote from the Wall Street Journal:

“Trucking company failures have jumped this year, reaching 795 shutdowns in the first three quarters of 2019, more than three times the total number of trucker failures for the same period in 2018, according to transportation industry data firm Broughton Capital LLC”.

These sectoral weaknesses are occurring at a time when the non-investment grade markets are trading at highs.

As Bloomberg reported high yield bonds yields are trading at 2 year lows.

High-Low

At the same time, we’re hearing across all non-investment grade sectors that there is a wide discrepancy in spreads between higher quality/rated borrowers and lower rated ones.

That’s also the case by sector.

It’s as if lenders believe the weaker sectors can be quarantined (which is making capital raising harder and pushing out spreads) while business as usual can continue everywhere else.

That may be.

Have We Been Warned ?

Or the troubles in several sectors (energy, retail, trucking, healthcare, mining) could be the “canary in the coal mine” that markets are unwilling to pay attention to.

We don’t pretend to know but we did highlight this interesting fact from S&P Global Ratings:

The U.S. distress ratio widened to 8.5% as of Oct. 15, from 7.6% on Sept. 16, with the oil & gas sector seeing the sharpest rise since last year.

Just For Us

Much of this data comes from non-investment grade markets that are similar or have some overlap with the BDC sector.

What we’re trying to do is develop credit metrics that apply just to the $108bn in AUM  BDC market, but it’s a hard slog.

Nonetheless, we do have – in some cases – explicit data about what percentage of a BDC’s portfolio is under-performing.

Ironically enough the data is from the BDCs themselves.

Many report those sort of numbers quarterly in their 10-Q, but some do not.

(Why the SEC allows some BDCs to report internal investment ratings and some not is not clear to us).

We’re still in the process of inputting all the available data for the IIIQ 2019, which covers three-quarters of public BDCs.

Partial Picture

We can report, though, that in the June 2019 ended quarter half the reporting BDCs acknowledged that a fifth or more of portfolio assets at FMV were performing below expectations.

In some individual cases a third of a BDC’s total portfolio was under-performing.

We’ll share the IIIQ 2019 results once assembled, but we’ll say in advance that we expect the numbers to look worse for the third quarter.

That’s based on the data we’ve gathered and input so far.

Puzzled

When we juxtapose the darkening credit data with the recent upsurge in BDC sector prices we’re a little befuddled.

Maybe the markets have looked at all the same information and concluded that despite the gathering credit storm clouds,  we are not going to get rained on, or only certain already identified sectors ?

That’s a valid possibility, and that could well turn out to be the case.

If credit losses in 2020 remain relatively low in aggregate that will have proven to be the right view.

Alternatives

On the other hand, the markets could be in an unduly optimistic mode and higher credit losses might start to materially erode earnings and cause a re-think on BDC stock prices.

Or BDC prices are just driven by algorithms and will just track what the major indices do, for good or ill…

It’s a fascinating subject and one we’ll be discussing regularly in the weeks and months ahead on these pages.


Nicholas Marshi, The BDC Reporter


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