BDC Common Stocks Market Recap: Week Ended December 18, 2020

BDC COMMON STOCKS

Gulp

We have to begin with an apology and a correction.

Apparently the good people at UBS have swapped out their BDC sector exchange traded note with the ticker BDCS for an almost identical one with ticker BDCZ.

We missed this swap out and have been drawing the wrong conclusions about the change in price in BDCS for a couple of weeks.

The BDC Reporter uses data from multiple other sources including Wells Fargo and Seeking Alpha so it’s only one data point.

Nonetheless, we are blushing and apologize and have updated our database with the correct numbers.

Getting Back To The Narrative

On the week, BDCZ dropped by (0.37%) to $16.15 from $16.21.

Over the past two weeks BDCZ is down by (2.25%).

Using the BDCZ chart, we now see that the BDC sector peaked on December 4, 2020 at a price of $16.55.

Up And Down

On the week 19 BDC stocks were up, but 26 were down in price.

There were three BDCs that increased by 3.0% or more this week: Portman Ridge (PTMN); Gladstone Capital (GLAD) and Gladstone Investment (GAIN).

PTMN was up an impressive 10.2% but given that the BDC still closed at a price of just $1.84 this might be more of a reflection of how far the price has fallen.

The BDC still trades at a (35%) discount to net book value.

GAINing

Intriguing is the rise in GAIN’s stock price despite lacklustre results in recent quarters and recurring earnings well below the dividend.

However, after this latest price jump GAIN is trading only (3%) off book value .

GAIN was as low as $8.16 at the end of October, but has now increased in price to $10.49, or 29%.

Cost Improvement

GLAD’s price boost may be related to this week’s issuance of new, less expensive,  unsecured debt to replace one of its Baby Bonds.

Presumably, investors are counting on higher earnings out of this.

The analyst consensus for the coming quarter and fiscal year, though, does not seem to have changed.

Down

In the red for the week was the (22%) drop in Harvest Capital’s (HCAP)  stock price to $5.41.

From an inexplicable high of $7.53 on December 10, the minnow-sized BDC which trades about a quarter of a million dollars in value a day, has dropped (28%).

That’s after rising 150% in price between late November and that December 10 apex.

All this sturm und drang may be because HCAP announced on November 24 the paying out of two long delayed monthly distributions that total $0.16, whose ex-date was December 15.

We’ve checked the BDC’s filings and found no other public information that could have triggered all this feverish buying and selling.

Trend

It seems as if the smaller, underperforming BDCs like HCAP – but also Capitala Finance (CPTA); Investcorp Credit Management (ICMB); Great Elm (GECC) and others – have become speculators favorites.

The total dollars traded are not very high given the market capitalization of these BDCs but the percentage swings up and down are monumental.

At this stage this phenomenon does not seem at an end, so look for more rocket ships and falling knives in the weeks ahead.

Settling Up

We’re also getting close to year-end, which means investors are taking profits after a 5 week rally.

That might explain why several other BDCs dropped substantially in price led by Stellus Capital (SCM); Monroe Capital (MRCC), FS KKR Capital (FSK) and FS KKR Capital II (FSKR).

The drops in price were (12%), (11%), (10%) and (7%) respectively – all in the absence of material news.

Sun Is Shining

Still, overall the BDC sector is looking up as we fast approach year end, helped by that afore mentioned rally and despite the last two weeks mild pullback.

Most notably – and according to Seeking Alpha – two BDC stocks are actually trading higher in price now than at the beginning of the year.

Those two exceptions to the general rule are Oaktree Specialty Lending (OCSL) and Hercules Capital (HTGC).

Horizon Technology Finance (HRZN), which was the market leader in this category, remains only (0.5%) in the red and trades at a 15% premium to book.

All In

The Wells Fargo BDC Scorecard Weighted Index, which provides a “total return” picture is just (4.8%) in the red after price changes and distributions are considered for 2020,

As we’ve mentioned before, with now less than two full trading weeks left in this misbegotten year, there’s still some hope the Wells index might creep into the black.

BDCZ, though, remains (20.5%) in the red and is most likely to remain there.

At this stage – and with only about a fifth of individual BDC stocks posting a positive “total return” in 2020 – this looks likely to go down in the books as a mediocre year for the sector.

Given that nine months ago market participants were using terms like “disaster”; “implosion” and “worst ever”, this is quite a change.

There are 10 BDCs out of 45 trading above book value.

That’s half the level of this time last year, but 10 more than in March 2020.

Unforgettable

Mediocre or otherwise, 2020 has been a year to remember.

Most notably of all what we will take away is that the BDC sector – highly leveraged at the beginning of the crisis thanks to the Small Business Credit Availability Act – survived a huge drop in LIBOR; a (brief) liquidity squeeze; a gut wrenching jump in underperforming assets and unprecedented economic and fiscal conditions without incurring a single casualty.

However – as is always the case in this highly diversified sector – some players performed better than others in this environment, even if all seemed to drop and rise in price simultaneously.

Consequences

We expect that in 2021, the piper will have to be paid as fee waivers roll off; some underperforming assets become non performing and shareholders look at ROE rather than just survival.

The number of BDCs is likely to shrink.

Between mergers of related players; acquisitions and liquidations we could see the number of public BDCs we track drop from 45 to as low as 35.

Some of those to disappear are well known like MVC Capital (MVC) which seems poised to merge into Barings BDC (BBDC) by Christmas.

More controversially, we wouldn’t be surprised to see more managers with dual public vehicles merge one into the other like FSK and FSKR and OCSL and OCSI are about to do.

Then there are several BDCs essentially making no real return for their shareholders – or even their managers which could leave the scene in some manner.

By this time next year total assets under management might not be much changed – or could even be higher- but the BDC players discussed on these pages could substantially shrink.

Doubling Up

Given that Christmas Day lands on next Friday and the markets are likely to be quiet, we won’t be writing a Recap next week.

Instead, we’ll write again about the period between December 21 and 31 in the new year.

At that point we’ll have the full year data as well as the last minute price changes.

Most Of All

With that, all we have left to to wish all our readers the happiest and safest of holidays possible under these exigent circumstances.