BDC Common Stocks Market Recap: Week Ended December 31, 2020Posted on January 4, 2021
BDC COMMON STOCKS
The BDC Reporter is back after a Christmas holiday break and with both the week and the year wrapped up.
We won’t say too much about the ups and downs of the last fortnight because they’re of little importance during the festive period.
Market participants focus is typically elsewhere so we won’t draw any material conclusions from very short term data.
So Long, Farewell
Worth noting, though, that the total public BDC universe has been reduced with the merger of MVC Capital (MVC) into Barings BDC (BBDC).
As a result the number of BDCs we track drops to 44 from 45.
Briefly – and for the record – 26 BDCs were up in price in this New Year-shortened week and 18 were down.
8 BDCs were up by 3% or more and only 2 were off in price by (3.0%) or more.
We close the year with 9 of the 44 BDCs tracked trading above book value.
The headline news, though, is that – with the benefit of hindsight – we can see that the massive BDC rally ended in very late November after one glorious month.
In November and up to December 4, BDCZ – the replacement to BDCS and the best way to value sector price changes – increased 27% !
That was TWICE the pace of the S&P 500 index.
Since that surge of surges – and for essentially the entire month of December – the sector is flat price-wise.
As is often the case where BDC investing – and more generally – most of the upside gains were made in a few days.
Those who hesitated lost out – as occurred in March – in the bulk of the price gains on offer in this difficult year.
Year In Review
Speaking of 2020 in its entirety: BDCZ was off by (20.5%), that surge notwithstanding.
The “total return” Wells Fargo BDC Scorecard Weighted Index ended just (4.6%) in the red.
The obvious conclusion here – and the one we’ve been preparing for in recent weeks as the rally petered out – is that 2020 was a poor year for BDC investors, but could have been – and was at one point – much worse.
Thank the Fed, the Treasury or just those “animal spirits” returning to the markets after a few weeks of existential doubt, but there’s no question we averted the abyss.
At one point virtually every BDC in March was at its all-time low price; nobody traded above book and many stocks could be bought for under $3 a share.
In many cases, liquidity was tight and virtually every BDC – even those who ultimately maintained both earnings and dividends unchanged – were in scramble mode.
After all, this was not the crisis that BDCs, and their investors, had prepared for so uncertainty was at the highest we’ve ever encountered in our twenty years plus fishing in these waters.
So, for BDC investors to survive this car crash of a year with a “total return” loss in the middle single digits is a little miracle of sorts.
Which is not to say that many individual BDCs have not been badly banged up in 2020.
The BDC NAV Change Table is a good guide in this regard.
We track NAV Per Share changes, including the IIIQ 2020 number for each BDC versus IVQ 2019.
That shows 15 BDCs have booked an NAV loss of greater than (10%) in just three quarters.
Included are three BDCs that managed to lose (30%) or more by this metric: Great Elm (GECC; BlackRock Capital (BKCC) and Medley Capital (MCC) – which is now called PhenixFIN (PFN).
From a price standpoint: 34 of 44 fell by (10%) or more.
Of that group, 10 were off by (30%) or more, led by Capitala Finance (CPTA) at (73%).
Of course, the year might be over but price changes will continue and those losses might get mitigated in the weeks and months ahead.
Nonetheless, there is no doubt that many BDCs did get harshly punished price-wise.
As Monty Python Would Say
On the brighter side, three BDCs can boast higher NAV Per Share metrics as of September 2020 than at year-end 2019 and four higher prices, if you include FS KKR Capital II (FSKR), which went public during the year.
The lending sector that clearly fared best in 2020 was venture.
The three BDCs involved in this area: Hercules Capital (HTGC); Horizon Technology Finance (HRZN) and TriplePoint Venture Growth (TPVG) had good metrics from both an NAV and price perspective.
All were able to maintain an unchanged distribution through thick and thin.
Making Good Choices
Overall – and as always – stock selection was very important.
What you happened to own in 2020 made a big difference whether you ended up happy or sad at year’s end.
For example, if you owned a portfolio of disparate names like Oaktree Specialty Lending (OCSL); Sixth Street Specialty Lending (TSLX) and WhiteHorse Finance (WHF) you’d be having a different experience than if you held MCC, CPTA and BKCC.
We mention this to remind readers of a frequent refrain of ours: BDC investing is well suited for stock pickers.
Ironically this is an industry where all the players get lumped together when being discussed by financial journalists and whose prices tend to move in unison for short periods.
However, over the long term, properly identifying who “to hold and who to fold” is critical.
We look for support for our view in Seeking Alpha’s 5 year total return numbers for every BDC.
Of the 38 names that have been with us for half a decade the range of total return (which includes this difficult year) goes from a gain of 136% to a loss of (72%).
That’s a very wide divergence.
If you picked the three best and worst performers, your average gain over 5 years would have been 120% and your loss (63%).
It’s long term statistics like those that keep us digging into the risks and opportunities inherent in every individual BDC rather than “buy the sector” and hope for the best.
Not Going Away
We expect this wide variation in price performance to continue in 2021 even though weaker BDCs are increasingly being bought out.
In recent years – to name just a few – we’ve lost MCG Capital; KCAP Financial; Triangle Capital; OHA Investment and now MVC.
Unfortunately – both for the BDCs involved and their shareholders – many underperforming BDCs remain.
Making A List
We couldn’t help but look down the list of soon-to-be 41 public BDCs (OCSL will be absorbing OCSI; FSKR will merge into FSK, HCAP is being acquired by PTMN) and identified 11 which – we believe – face serious challenges.
On the other hand, that leaves 30 BDCs whose prospects are – at least – fair.
Moreover, we have the example of OCSL which in 2020 – under Oaktree Capital Management’s tutelage – has effected a turnaround that was long promised but could not be taken for granted.
Between its price height in 2011 and its nadir under Fifth Street’s management, the BDC saw its stock price drop over (70%) and its payout cut in half.
Since its low point in 2017 – when Oaktree came on board – the BDC’s stock price has increased 43%, and in 2020 its dividend was increased.
The number of BDCs that have gone in the last twenty years from “zero to hero” is relatively small, but sufficient to give us hope.
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