BDC Common Stocks Market Recap: Week Ended February 12, 2021Posted on February 16, 2021
BDC COMMON STOCKS
Another week, another rise in BDC common stock prices. Our sector price guide – the BDC Exchange Traded Note with the ticker BDCZ – was up 1.0%.
That other index we use – the S&P BDC Index – which tracks “total return” performance – was up 1.3%.
This may not have been as frothy as last week, but 34 names out of 44 were in the black.
Of those, 11 increased by 3.0% or more – a quarter of the entire public BDC universe.
Tops this week was Capitala Finance (CPTA), up 6.6%.
You’ll have noticed that CPTA has not yet reported results or said much of anything.
It’s just that sort of market where investors are looking around for value where little is to be found given the broad-based rally underway for so long.
Even CPTA is hardly cheap. With this latest burst, the BDC is up 91% since the rally began.
Not So Wonderful
This despite the fact that CPTA does not pay a dividend and was barely profitable the last time we heard from them.
Net Investment Income Per Share was just $0.27 in the IIIQ 2020, (76%) off the prior year level.
Only 11% of investment income trickled down to the Net Investment Income line and even that was boosted by there being no incentive fee in the period.
Still, CPTA trades at a (59%) discount to book value so you can understand bargain hunters thinking.
Road Map ?
We’ve been expecting the external manager to provide some light on the way forward for CPTA – which has not paid a distribution since March of last year.
Maybe there’ll be a forthright discussion of the plans for the BDC’s future when fourth quarter earnings are reported ?
For all we know, the recent rise in price may be associated with some behind the scenes developments such as a sale, merger or some other potential value creating event.
There a lot of people in the know in situations like these.
Number two in terms of price increase was Prospect Capital (PSEC), which did report results this week and has maintained an unchanged monthly distribution.
The BDC – surprisingly – reported a 6.7% increase in net book value per share – the second highest of any BDC so far.
There’s a whole story behind this increase in book value that we’ll cover elsewhere, but suffice to know that more than three-quarters of their unrealized gain came from four “controlled” portfolio companies.
PSEC has 122 portfolio companies.
Investors were delighted and pushed up the BDC’s price by 6.1% this week.
PSEC is very much coming back into favor, with the stock up 29% in the past month, leading the entire sector in that time frame.
The third top mover was Monroe Capital (MRCC), up 5.4%.
Like CPTA, MRCC has not yet reported IVQ 2020 results but has set a date of March 2, with the conference call the next day.
Just three BDCs dropped (3.0%) or more in price and the damage was not too expensive.
BlackRock Capital (BKCC) was off (4.7%); PhenixFin (PFX) fell (3.6%) and Goldman Sachs BDC (GSBD) was down (3.7%).
We’re not surprised by the first two names which are thinly traded and subject to much speculation as to what happens next, both positive and negative.
This week the doubters outnumbered the believers but that could change next week.
Over a 1 month and 6 month time frame both BDCs are in the black.
We’re more intrigued by how the market is reacting to GSBD of late.
YTD – in very bullish conditions – GSBD is one of only three BDCs that is in the red price-wise, off (5.5%).
Moreover this is coming when the BDC is paying not only their regular $0.45 a quarter/$1.80 a year “regular distribution but also three special distributions totaling $0.15.
These extra payouts are related to the merger of GSBD with its sister fund and are being paid out through August 2021 in three installments.
The analyst consensus for 2021 Net Investment Income Per Share is for $1.84, a slight increase over the projected 2020 level.
Yet, GSBD’s stock price has been dropping – in fits and starts – since December 4 2020, as the chart above illustrates.
Not to say that GSBD either is “cheap” as the stock price remains above book value.
Still on a price to future earnings basis GSBD is trading in single digit – 9.8x.
By comparison, Golub Capital (GBDC) – which has a very loyal following in the markets despite cutting its distribution last year – is at a 12.7x multiple.
Main Street Capital (MAIN), which has lost some of its luster of late thanks to suspending its “special dividends”, is still trading at 15.5x 2021 projected EPS.
So why is GSBD not getting the love the BDC is accustomed to – currently trading (30%) below it’s all-time high despite boasting an unchanged distribution through its life as a public company ?
We don’t know the answer, but will be intrigued to see if there are any hints in the results that will be published February 25th, or will we find that GSBD investors have just been taking profits ?
Right now everything everywhere seems to be increasing in value.
The S&P 500 index was up 1.23% , but also up this week were the NASDAQ, the Dow Jones, the Russell and the price of oil.
Also, prices have now risen so much that junk bond yields now average below 4.0% – their lowest level ever – says Barron’s.
A similar phenomenon is underway in the institutional leveraged loan market.
Here we quote from a recent S&P Global Market Intelligence article:
“The average yield to maturity and spread to maturity of loans breaking in January continued lower, with the average yield to maturity plunging to 4.20% and the spread falling to L+350, its lowest level since the onset of the repricing wave at the beginning of 2020. Meanwhile, the average yield to maturity of deals allocating in January is the lowest monthly figure since LCD began tracking this data in 2006”.
All In This Together
No sector is an island and as we much as we’d like to believe the BDC rally is due principally to improving fundamentals, there are larger forces at work.
Records are being broken but one has to ask how low (or how high ) can we go with many weeks of rallying in the rear view mirror ?
This week we saw Ares Capital (ARCC) take advantage of those favorable conditions to issue new equity.
With less publicity, we’re sure the several BDC stock ATM programs in existence have been issuing new shares as well.
We’ll be interested to see if these sunny days can last long enough for a bevy of BDCs to undertake secondaries in imitation of ARCC.
That could materially boost the size of the BDC sector ; help with trading volumes and point towards ever higher assets under management.
It may also encourage asset managers with private BDC funds to merge some of them with their public brethren or make the private to public journey.
As we keep reminding ourselves less than one year after the darkest days of the pandemic these are “Golden Days” for BDCs – and BDC investors.
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