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BDC Common Stocks Market Recap: Week Ended February 5, 2021

Posted on February 8, 2021

BDCs:  Multiple

BDC COMMON STOCKS

 

WEEK FIVE

The One With The Big Increase

Week Five of 2021 was remarkable from a price standpoint as the BDC common stock rally took another big leap forward after dropping the week before.

BDCZ – that UBS Exchange Traded Note which owns most BDC stocks – was up 6.6%.

The S&P BDC Index increased 6.5%.

Both measures were higher even than the S&P 500 index which increased a still impressive 4.65%.

Looking Back

For the BDC sector this was the biggest percentage price gain since late November 2020 when the rally was in full swing.

Most notable of all,  36 BDCs out of 44 were up 3.0% or more,  of which 8 increased by double digits.

No BDC dropped in price by more than (2.1%).

Now 14 BDCs are trading above their book value, the highest number since the pre-pandemic period when there were 20.

Divination

Why investors re-embraced BDC common stocks after a brief pushing away is impossible to know for sure, but we’ve got theories.

First of all,  the broader markets got back to their record breaking path.

Just as an apt reminder here’s the 1 year chart for the S&P 500:

That’s a bull market folks, Covid be damned, and BDC investors are following along.

Then there were the first BDC IVQ 2020 results, both the preliminary metrics offered by some BDCs in prior weeks and the actual numbers from six different funds.

See the BDC Performance Table.

Specifics

By our estimate, 5 posted GOOD results and 1 FAIR.

(Regarding the latter, that was the rating we gave Apollo Investment or AINV, but investors reacted much more favorably, pushing the price up 11.9% on the week).

All the BDCs that reported boasted higher NAV Per Share.

Capital Southwest (CSWC), Oaktree Specialty Lending (OCSL) and Oaktree Strategic Income (OCSI) joined Saratoga Investment (SAR) in lifting their regular distributions.

These are the sort of metrics that investors generalize over the entire sector and lifts spirits – already pretty buoyant – even higher.

Tell Tale

We know this is a rally because investors are indiscriminately lifting all boats three months after this upsurge began.

42 BDCs are trading above their 50 day moving average and 43 over the 200 day moving average.

(The only left out of the party is Great Elm (GECC) which is trading (17%) below its 200 day moving average).

Wider Lens

Pulling back a little, we see that BDCZ has increased 30% in price since October 30, 2020 – roughly when investors started to open their cheque books again.

The S&P BDC index shows a 34% “total return” over the same period.

(The constituent BDCs in the two indexes – and their weightings- are different and are not exactly comparable.

Same Time Last Year

All the above notwithstanding the BDC sector is still a little way from fully recovering from the ravages of the pandemic and the sharp drop in LIBOR that gutted earnings and dividends.

Here’s the BDCZ chart for 12 months, off (17%), according to Yahoo Finance.

However, thanks to BDCs dividend paying power, the S&P BDC Index is off just (2.6%) in the same 12 month period. See below:

Just one more week like this one and the BDC sector will be back in the black on a “total return” basis.

That’s quite an about-face for a sector that saw BDCZ drop (57%) in one month, starting February 20, 2020…

What’s Next ?

Of course, that is the question on everybody’s mind.

There are still several weeks of the BDC earnings season to go, even if it feels like investors know what to expect and have made their bets already.

Based on prior experience, we wouldn’t be surprised to see profit taking this next week or in March when the last BDC has reported.

If we’re wrong,  this rally will be going into its fifth month.

That’s long by BDC standards but not unheard of.

 

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