BDC Common Stocks Market Recap: Week Ended January 15, 2021

BDC COMMON STOCKS

WEEK TWO

After the December 2020 lull, BDC common stock prices are on the rise again, up for a second week in a row in 2021.

Using the S&P BDC index – which we’ve adopted this year to measure such things – the BDC sector is up 1.71% in the week ended January 15.

For the first fortnight of 2021 the index is up 3.86%, as the chart below illustrates:

More Up Than Down

Of the 44 public BDCs we track, 35 were in the black this week and 35 the week before.

Of the 35, nearly a third (10, to be exact), were up 3% or more and of the 9 in the red just one dropped by more than (3.0%) southwards.

On The Podium

The winners in the price race this week were Prospect Capital (PSEC) up 6.9% ; Pennant Park (PNNT) up 6.6% and Newtek Business (NEWT) up 5.0%.

Coincidentally or otherwise – as our readers already know – both PSEC and NEWT announced new, substantially less expensive, unsecured debt offerings this week.

The bottom line is that both BDCs will enjoy greater liquidity and a lower cost of capital as a result.

Right Place

NEWT may also be benefiting from the opening of the Payroll Protection Program (PPP) portal for round two of government munificence to smaller, Covid-challenged companies.

Last time the PPP was launched, NEWT made a windfall offering the financing – and then selling on the obligations.

PPP II, like most sequels except for Godfather II, will not match the original but should still be a “good little earner” for the idiosyncratic BDC.

Furthermore, investors in the BDC will be hoping that the year ahead will see small-cap borrowers return to the market for a variety of SBA products, which NEWT intermediates.

Question Marked

For the life of us we can’t work out why PNNT suddenly gained investors favor.

All the BDC has announced of late is its upcoming earnings release on February 10, 2021 – see the BDC Earnings Calendar.

As this chart shows PNNT has been on an upward run of late. Just since January 4 of this year, its stock price is up over 10%:

With the BDC still trading after this run-up at 65% of book value and a 9.0x multiple of FY 2022 Net Investment Income Per Share, “value” investors may be seeing opportunity.

The BDC currently yields 9.4%.

Hit Return

Back to the sector as a whole, we also note that 12 BDCs are trading above book value versus 11 the week before, and as little as 7 before the late year rally began.

Speaking of the rally – which we have as beginning October 30, 2020, taking a pause in December and starting up again in January-  is up an impressive 24.5%.

In that period we’ve not had more than 5 calendar days of consecutive down prices and no major drop-offs.

Truth Be Told

However, there’s no doubt that this price revival is getting long in the tooth and begs the question as to how much further this can go before another long pause as occurred between early May and late October of 2020, or a meaningful price drop.

Admittedly, only three BDCs are close to their 52 week highs (HRZN,OCSL and TPVG).

However, when we compared the 44 BDCs to their post Covid-highs we found 4 to be above and a whopping 38 within (10%).

Leftovers

Only two BDCs are currently trading more than (10%) off their March 2020-January 2021 high point.

For the record, the BDCs left behind are – not surprisingly – BlackRock Investment (BKCC) and Great Elm (GECC).

Both those BDCs have reduced their pay-outs and paid their dividends in stock during the course of 2020, and been punished accordingly by the markets.

Everyone Else

What surprises us most is how – GECC and BKCC notwithstanding – the rising tide has raised all boats.

By our lights, we still see a host of BDCs being performance challenged in 2021; facing a combination of  credit; liquidity and credibility problems.

We won’t be so rude as to name names but it’s well known that several BDCs are more in wind-up mode than anything else, even if we don’t count Harvest Capital (HCAP), which is to be merged into Portman Ridge (PTMN).

Furthermore, in our internal 5 year dividend projections that we undertake for every BDC and which we update in real time, there are 8 BDCs that we expect to cut their dividends in the next 12 months.

In addition, 23 BDCs (after we take out HCAP, FSKR and OCSL – all scheduled to be merged into other BDCs) we don’t expect to increase their pay-outs in 2021.

Testing Times

Do the expected dividend increases by less than a quarter of the BDC universe justify this broad based enthusiasm ?

The IVQ 2020 results – coming in early to mid February – will decide if investors have been over-optimistic or preternaturally wise.

Or, to put matters another way, we could see much individual stock price adjustment when the latest results become known.

We’re still a couple of weeks away from the beginning of earnings season and only a handful of players have even named the date, but the rocking and rolling has been known to occur both in advance and following earnings releases.

The BDC Reporter projects even more volatility than we’ve had of late in the next 6 weeks.

Rhetorical Questioning To Close

What we can’t tell if the overall price trend, though, will be up or down ?

For much of last year investors were overly-pessimistic about the BDC sector – leaving this segment of the financial industry – out of the broader market rally till late in the year, and still a dollar short.

Are investors now being a tad too optimistic ?

We shall know before long.

Of course, what is happening in the broader markets will also be an influence on where BDC prices go as well.