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BDC Common Stocks Market Recap: Week Ended February 26, 2021

Posted on March 1, 2021

BDCs: Multiple BDCs

 

BDC COMMON STOCKS

Week Eight


Miraculous

We’re two months into 2021 and – more importantly for BDC common stock investors – four months into one of the most powerful rallies in the sector’s history.

As always in these situations we’ll lean on a price chart –  the UBS Exchange Rated Note with the ticker BDCZ, which contains most of the BDC stocks – for the price change since October 29, 2020.

For context, we’re adding how the S&P 500 index has performed in this same period – often used by investors and commentators as the standard for stock performance.


Well Ahead

As you can see, BDCZ is up 32% in these 4 months, more than twice the pace of the S&P 500

Furthermore – as rallies go – it’s been a relatively easy ride, with only a handful of pullbacks along the way and very few above a (3.0%) drop.

If you looked at a similar chart for the S&P BDC “total return” index over this same time frame the return is even higher: 38%.


YTD By BDC

We don’t have access to the individual BDC stocks price change over this period but Seeking Alpha does publish a 2021 year-to-date compilation.

In just these first 2 months of the year, 42 of the 44 public BDC stocks we track are up in price.

Some of the price changes in that brief period are monumental as investors seem to be drastically re-drafting their views of the BDCs involved.

For example, Prospect Capital (PSEC) is up 35%Apollo Investment (AINV) 30% and Oxford Square Capital (OXSQ) 25%.


Hand Wringing

As often happens in red hot rallies – the BDC Reporter regularly cautions that these sort of increases cannot last and a correction is more likely than not coming.

On Thursday – as part of a general market pullback – we did see virtually every BDC lose several percentage points in price.

BDCZ dropped (2.6%) in a day and a half.

“Here we go” the BDC Reporter said to itself knowingly.

However, by Friday, investors were back to the races and BDCZ closed at $17.75, up 1.7% for the week and the best result in the last three weeks.

Three quarters of the BDC universe were up in price and only a quarter were down.

Moreover, 9 of the 33 in the black were up by a strong 3.0% or more while only one BDC fell by (3.0%) or more.

The latter was PSEC, off by (4%), probably due to profit taking as BDC investing has gained some of the attributes of a casino with investors raking off profits.


Above The Line

Overall, and using the 200 day moving average, 43 of 44 BDCs are trading above and only 1 below (Great Elm or GECC).

For BDC investors in these last 4 months virtually wherever you placed your chips, or when you chose to join the rally, profits have ensued.

Heck, even GECC was up in price this week thanks to its $0.10 dividend announcement.


Like A Bad Dream

The terrible impact of the pandemic in late February through the end of March 2020 has (almost) been entirely erased despite the fact that many BDCs have not fully recovered.

The BDC: NAV Change Table shows only 7 BDCs have recorded higher NAV Per Share in 2020 than at the end of 2019.

The BDC Performance Table indicates 27 BDCs paid out lower distributions last year than in 2019.

Yet, BDCZ – as this chart shows – is only (5.5% ) down on a 1 year basis and the S&P BDC index is up 5.6%, as this chart shows:


Back And Forth

BDC investors have gone from deep pessimism to heady optimism, but neither state tends to last for too long.

With BDC earnings season coming to a close and the broader markets showings signs of strain – the S&P 500 was down (2.5%) this week – we continue to expect the party to end shortly.


Built On Fundamentals

On the other hand, BDC earnings season to date has certainly confirmed investor confidence.

So far – as the BDC Performance Table shows – 27 of the 44 BDCs have reported IVQ 2020 results.

By our admittedly subjective ratings, the performance of 23 has been GOOD3 have been FAIR and only 1 POOR (PhenixFin – in a category all by itself and the only one to duck having a conference call).


Time Of Plenty

What’s more, BDC liquidity – which we also rate – is almost universally GOOD.

We do worry a little about Investcorp Credit Management BDC (ICMB) in this regard but with a big name manager and a frothy capital market there’s no immediate danger.


Third Horseman

Credit quality – in most every case and to the degree we’ve been able to take an in-depth look in the flurry of earnings releases – is almost universally improving.

The very incomplete BDC Credit Table shows many BDCs reducing the number and value of their non performing assets, as well as the FMV of their overall underperforming investments.

There have been a few new non accruals added to BDC books, but these have largely been more than offset by names departing, mostly through being restructured or sold and realized losses booked.

Then there’s the constant issuance of new unsecured debt – either private or public – at lower rates, which is the gift which will keep on giving in the form of stronger balance sheets and lower interest bills for years to come.


What Else You Got ?

Still, that’s all out in the open and taken into account by the market.

Looking a little further down the road things could get a little rockier.

First of all the furious pace of IVQ 2020 activity – much of it catch-up from those months of inaction bankers spent at home in their pajamas – is quieting down.

That’s boosted fees and OID capture and the like, but is unlikely to be maintained through 2021.

Then there’s the perennial difficulty of getting fully invested in a market when refinancings keep flowing in.

Finally, we’re back in every segment of the leveraged debt market to supply exceeding demand, which will continue to press on loan spreads and terms.

Market conditions were lender-friendly for about a New York Minute but once borrowers and lenders realized the end of the world was not upon them, borrowers are back in charge.

It’s no wonder that some BDCs are launching off-balance JVs – quietly boosting their already high borrowing levels – to spice up their portfolio yields.


Most Unexpected

Notice we’ve said nothing about credit, which we still expect to broadly improve in 2021.

Even the BDCs with a large number of underperformers have taken their bitter medicine in the form of unrealized losses and debt placed on non accrual.

BDCs – and BDC investors – seem unlikely to be contending with credit as a major headwind till 2022-2023 when these borrower-friendly days could result in paying the Piper.

Incomplete

Still, we’re getting ahead of ourselves as 17 BDCs have not reported results as yet – some of them with well known troubles.

We doubt a few BDCs reporting POOR results will – by itself – shift the overall holiday mood, but we’ll see.

In the week ahead as the BDC Earnings Table shows at least 9 BDCs will be publishing and discussing their results.


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