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BDC Common Stocks Market Recap: Week Ended December 6, 2019

Posted on December 9, 2019

BDC COMMON STOCKS

On The Verge

Another week of the BDC sector – as measured by the UBS Exchange Traded Note with the ticker BDCS – moving up.

Since October 14, 2019 BDCS has moved up in an almost straight upward line.

As of the close on Friday December 6, 2019 BDCS was at $20.25.

That’s a 4.9% increase, just a hair’s breadth away from when we would say a “rally” is underway.

Pointing Fingers ?

As we’ve indicated before, it’s hard to tell how much this late in the year investor enthusiasm for everything BDC is about sector prospects, and how much a tracking of the major markets.

BDCS (the purple line) has been moving in lock-step in terms of direction with all the major indices since mid-October, as the chart below indicates.

This week BDCS was up 2.1% and the S&P 500 1.1%, but over the entire 7 week period the latter is performing a little better in price terms.

Muted Enthusiasm

Still, this is no wide-eyed rush to “buy, buy, buy” judging by most of the metrics we review weekly.

On the week, 21 individual BDC issues were up or unchanged in price, but that means 25 were down.

There were just 3 BDC issues that went up 3.0% or more on the week, and 2 that were (3.0%) or more down.

Last week 13 were up 3.0% or more and nobody dropped by the 3.0% minimum.

The number of BDCs trading at or above book value remained unchanged for yet another week at 17.

Inquiring Minds

The key question BDC investors will be asking themselves is whether the BDC sector is about to “break out” and continue rising, or just continue to fluctuate in a narrow range ?

This year-to-date chart of BDCS below perfectly illustrates how 2019 has gone since the December 26 2018-February 22, 2019 rally:

Shallow

Yes, there have been spiky ups and downs for BDCS, but within a narrow range of about 5%.

By historic BDC price movement standards that’s remarkably stable.

For example, in 2014 the stock price range of BDCS from highest to lowest was 19%.

Our View

Our educated guess is that – at best – investors can expect a continuation of the ups and downs of the past 10 months rather than a continuation of the upward trend (i.e. a “rally”).

Funny things can happen for a short period in the last few weeks of any year with portfolios being rebalanced, but we don’t expect the upward price momentum to continue much longer or much further.

We’ll soon see if those prove to be famous last words.

No Major Fireworks

Certainly – as last week – there’s been little of individual BDC or sector moving news, which has given the BDC Reporter time to catch up on reviewing and analyzing much of the data from third quarter earnings season.

We’ve fully updated the BDC Dividend Table and we’ll be undertaking a write-up of our principal conclusions this coming week.

Also completed is our tracking, in a comprehensive table, the quarterly book value per share changes of every BDC since IVQ 2017 (including the latest quarter).

Obviously, over the long term what’s happening to a BDC’s book value per share is a useful way to evaluate financial health and future prospects.

That, too, will get a full analytical article once Medley Capital (MCC) reports its results and all 46 BDCs can be compared.

In The News

There were a couple of noteworthy news developments during the week, previewed as always on our Twitter feed and on the front page of the BDC Reporter website.

We’re not infallible but you can be pretty sure that if anything remotely important has happened in the public BDC sector we’ll have noted as much on Twitter.

If the subject is of market moving importance we’ll usually follow up in a very short time with our analysis and commentary.

This week, Main Street (MAIN) went back to the unsecured debt well and raised $75mn of institutionally-placed Baby Bonds.

However, as we also noted around the same time, neither the amount raised (under 7% of total debt already outstanding) nor the interest rate are likely to move MAIN’s earnings needle much.

Leaving

Also last week a BDC CEO quit/departed, which would normally be Big News.

In this case – given the BDC was Alcentra Capital(ABDC), which is about to get a new external advisor and a whole new management team, there was no need for further discussion.

Ask And Ye Shall Receive

Another news item that got almost no press except in the BDC Reporter was the result of a once-postponed shareholder vote at Investcorp Credit Management BDC (ICMB).

The BDC – which used to be called CM Finance till Investcorp took over as manager – received shareholder permission to sell stock (up to 25% of current shares outstanding) below book value.

Many BDCs ask their shareholders for this option – which the BDC Reporter is always grumpily not in favor of – and most get their way.

Of late nothing much ever happens as a result.

The Reason Why

BDC managers are loath – even when shareholders have bent the knee – to dilute book value per share by selling new stock at a discount.

This was done in the 2008-2009 period in several instances and left a very bitter taste in shareholders mouths and a hole in their pocketbook.

Likewise, a couple of BDCs in the post recession period used this technique to grow their BDC portfolio size in a hurry.

That was good for the external manager, but less so for the BDC’s shareholders.

At least one of those manager groups is no longer with us.

Will They Or Won’t They ?

Will ICMB choose to raise capital below book now that they have permission to do so ?

We note that the stock price currently trades at a whopping (31%) discount to book.

Moreover, net book value per share has dropped (18.5%) since IVQ 2017, the eighth worst performance of any BDC tracked.

Non Committal

Of course, we don’t know the answer.

(Not coincidentally – we recently undertook a review of the BDC’s latest results for anyone interested in getting a quick run-down of where the BDC stands).

We can say, though, that if Investcorp seeks to issue a material amount of new equity capital from the public, chances are very good ICMB’s stock price will be headed south.

Last. Not Least.

Arguably, the most important – but not unexpected – development came after the close of the markets on Friday when WhiteHorse Finance (WHF) announced an equity sale.

In this case – and even more notable as a result – the BDC is not raising new equity capital but selling 2.25mn shares held by H.I.G Capital, which also serves as the BDC’s external manager.

Any time an existing insider group sells down a position in a BDC it’s worthy of attention.

In this case, H.I.G. Capital has been very forthright in the past about its desire to reduce its considerable exposure to WHF, and has sold blocks of shares before.

Good A Time As Any.

Given the buoyant market, this must have seemed like a good time to put more shares on the block.

(By the way, WHF’s book value per share has grown by 9.9% since IVQ 2017- the 3rd best record of all the BDCs we track).

Still, the stated sales price is $13.83, below book value of $15.36, and below the closing price of $14.00.

According to the Prospectus, the net proceeds to the seller will be $13.28.

That’s a (5.1%) to the market price and a (14%) discount to book value.

Understandable

Inevitably investors learning of the move will be asking themselves if the seller “knows something” the rest of us don’t, as is always the case in these block sales by insiders.

The amount of doubt will probably be reflected in WHF’s stock price when the markets open on Monday and in the days ahead.

Given where WHF has traded this year – and given the optimistic atmosphere we’re in – if the stock price drops for a sustained period below $13.50 it means investors are anxious, but not panicked.

Go below $13.00 – a level that has not occurred for all but a few days in 2019 – and we’d argue that remaining shareholders are beginning to hyper-ventilate.

If WHF’s price stays stable or increases (this does partly remove one uncertainty that keeps some investors away), then kudos to H.I.G. Capital and their advisors for getting the timing right.

Counting Down The Days

All in all, with the question mark as to where BDC sector pricing goes next; the upcoming earnings release of MCC (a whole subject unto itself); the possible share buy-back at ICMB and the planned one at WHF, the rest of the year will be interesting.

Much yet can happen to move individual BDCs and the sector as a group, not to mention what happens to the broader indices.

It’s rarely dull where BDC watching is concerned.

 

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Article by Nicholas Marshi, The BDC Reporter
nmarshi.bdcreporter@gmail.com