BDC Common Stocks Market Recap: Week Ended February 19, 2021

BDC COMMON STOCKS

WEEK SEVEN

Fortunate

The seventh week of 2021 was another positive one where BDC common stocks are concerned.

Although prices were not as red hot as the week before, BDCZ still increased by 0.6%, to land at $17.43.

The “total return” S&P BDC index was up 0.7%.

Divergent

This was all the more impressive because – for a change – the S&P 500 index dropped slightly: by (0.71%).

Generally speaking, BDC share prices tend to follow the broader market trends but there are exceptions to the rule – especially when the price change is modest – as this week proves.

Furthermore, 27 individual stocks were up and 17 down – a little less favorable than last week, but still in rally mode.

Seven BDCs managed to increase by (3.0%) or more and none dropped by (3.0%) or greater, which suggests the market is not yet turning tail en masse.

All Together

For the past month, 41 of 44 BDCs are up in price and 42 are above their 50 day moving average and 43 above the 200 day.

On a year-to-date basis in 2021, 43 of 44 BDCs are in the black pricewise – a remarkable near unanimity.

Odd BDC Out

Left behind – strangely enough and discussed last week – is Goldman Sachs BDC (GSBD).

We are still looking forward to digging into that conundrum when GSBD reports results February 25, 2021.

[See the BDC Earnings Calendar for all the details].

There’s been no news out of the BDC since we last lamented not understanding the market’s current price reticence.

Starting Strong

YTD, BDCZ is up 7.6% and the S&P BDC index 11.3%, so there’s no denying 2021 has been very kind to BDC investors so far.

If we look back to the beginning of this rally in late October (which involved a hiatus in December for holiday shopping), BDCZ is up 32%.

The chart below provides the one thousand words:

Numero Uno

Top of the heap this week is Stellus Capital (SCM), which has not yet reported its results but did redeem its Baby Bond with the ticker SCA, but that’s been on the cards for weeks.

SCM was up 6.2% to reach $11.51, and is only (4%) off its analyst price target of $12.00.

The yield is 8.7%.

Numero Duo

Capital Southwest (CSWC) was up 5.2%, less than three weeks after reporting positive IVQ 2020 results, as we discussed in our review on February 1, 2021.

The price on Friday was $21.56, not very far from its highest ever level since joining the ranks of the public BDCs.

That record was set May 6, 2021 at a price of $22.37.

Trio

Third in line was Prospect Capital (PSEC), which we’ve discussed recently in these Recaps, up 4.6% this week.

More importantly if you were a shareholder of PSEC since December 31, 2019 the BDC boasts the highest price increase YTD: 40%.

News Rewind

This was a very busy week where BDC developments are concerned, even though only two BDCs reported IVQ 2020 results.

(The BDC Reporter covered both: the former in a full review, and the latter in the newly launched BDC: Latest Results Summary).

Much of the activity involved BDC Fixed Income which we’ll review in our other periodic recap.

Coming Together

Otherwise, we were reminded this week in an Investor Presentation that Oaktree Strategic Income (OCSI) will shortly disappear into Oaktree Specialty Lending (OCSL).

Once the vote by both sets of shareholders is held on March 15th, the merger will be very close to being effected.

That will bring the number of public BDCs down to 43, and then 42 when Harvest Capital (HCAP) merges into Portman Ridge (PTMN).

The HCAP shareholder vote is scheduled for June 10, 2021.

Finally, FS KKR Capital II (FSKR) will be joining FS KKR Capital (FSK) shortly.

No vote date yet set. That will shrink the BDC universe to 41.

The BDC Reporter has been predicting that the number of public BDCs might get even smaller than 41 by year’s end but nothing new has yet occurred.

Still, we’re only seven weeks into 2021…

Bigger And Better

On an entirely different note, and a little lost in the deluge of news, was Saratoga Investment’s anticipated extension and expansion of its in-house CLO.

This vehicle has been around for ages – even before the current managers took charge – and has had more incarnations than Madonna.

From what we can tell from the BDC’s press release, the retention of the CLO and its increase in size should benefit shareholders for years to come.

The BDC Reporter is generally sniffy about public BDCs incorporating material exposure to CLO investing in their business strategy, but SAR has made this work for over a decade.

Here’s what the BDC Reporter had to say on the subject on Seeking Alpha about the CLO news.

Looking Forward

Next week will be a busy one for BDC IVQ 2020 results reporting.

We count 10 BDCs in the BDC Earnings Calendar scheduled to reveal their most recent numbers.

All will be interesting for BDC shareholders and investors but we’re especially curious about GSBD and MAIN.

GSBD has already been discussed above, and is already slated for a full-fledged BDC review.

Looking Up

MAIN will be interesting because the BDC’s earnings – both recurring income and realized gains from selling equity stakes in portfolio – were greatly impacted in the early months of the pandemic.

Like at other lower middle market (LMM) focused BDCs, there was understandable concern about what suddenly changed economic conditions might do to credit results; interest payments and dividend distributions from portfolio companies.

This was reflected in MAIN’s own distributions to its shareholders, which dropped (15%) in 2020 compared to 2019.

What we’ve seen, though, elsewhere is that the LMM has bounced back strongly, including much in the way of leveraged buyouts; dividend recaps and all the activity of a heated leveraged finance market.

Has MAIN caught the wave and will we hear about recent or likely sale of portfolio investments at a profit and in sufficient amounts to offset any realized losses ? Will portfolio companies increase their distributions rather than husband cash ?

We have a hunch that things could be looking up.

The BDC closed at $35.01, still (22%) behind its all-time high set just 10 days before the pandemic brought the whole sector to its knees last year.

Like Icarus ?

With that said – and with so many BDCs reaching new highs and trading over book value – we continue to expect some drop in prices – or at least a flattening – to occur.

However, the BDC sector is continually surprising us about how high – and how low –  investor sentiment can vary in a short period.

Let’s not forget that less than a year ago – on March 30, 2020 – BDCZ was trading at half today’s level…

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