BDC Common Stocks Market Recap: Week Ended January 22, 2021Posted on January 25, 2021
BDC COMMON STOCKS
The second stage of the BDC rally that began in November – took a holiday break in December – and resumed in January, rolls on.
In this third week of the new year, the S&P BDC Index increased by 1.0%.
That other monitor of BDC price activity – the UBS Exchange Traded Note with the ticker BDCZ – was up 0.9%.
More pertinently – and continuing a now long established trend – a good deal more individual BDCs went up in price than went down.
This week there were 31 which moved up in price or stayed flat and 13 that saw their price fall.
Of the BDCs going up, 7 increased by 3.0% or more and only 2 fell by a corresponding percentage.
Way ahead of everyone else was tiny, troubled Capitala Finance (CPTA): up 15.1%.
This is not the first time of late we’ve noticed or commented on the BDC – which is still not paying a dividend’s – renewed attractiveness to investors.
Last quarter, the BDC’s Net Investment Income Per Share – NIIPS – was $0.27.
For 2021, the 3 analysts covering the stock have projected NIIPS will reach $0.90.
As of Friday, the BDC closed at $16.48, which entails a price to future earnings multiple of 18.3x !
(However, on a book value basis CPTA trades at just 0.41x).
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What’s happening here ?
We’re guessing that investors are presuming that CPTA might be being groomed to be sold in some way.
Maybe, the external manager – the Capitala Group – will acquire the assets for one of its other lending portfolios.
Or – less likely – CPTA will be sold to another asset manager, giving its manager time and space to focus on the rest of its business.
Or – least likely of all – investors are counting on a fast and furious rebound in CPTA’s earnings as a stand alone entity despite the fact that debt to equity is already over 2.1x.
CPTA is on the BDC Reporter’s cheatsheet of public BDC companies that might not be around in their current form when 2022 rolls round.
We’re guessing a sale of the assets – which will allow the repayment of the outstanding convertible debt, Baby Bond and SBIC debentures – is what’s going to happen.
This will become known before long, and we shall see if our powers of prediction are working.
Next In Line
Saratoga Investment (SAR) was in second place, with a 7.6% price increase on zero new developments.
We’re not much surprised as SAR reported very good results on January 6 – hashed out in an in-depth article – AND raised its distribution.
In the midst of a rally that’s the sort of performance that’s going to draw admirers, so it’s no wonder the BDC’s stock price is up 10.7% since the earnings release.
Also up in price by more than the usual is BlackRock Capital (BKCC) who reported preliminary results for the IVQ 2020 this week, as we covered on these pages.
Although plenty was not disclosed, BKCC said enough to cause its price to move up materially: 6.6% for the week.
This happened even though BKCC heavily hinted its NIIPS is likely to go down in the near future, and the dividend payout – already cut twice since mid-2019 – might be reduced a third time.
Again, investors – and the BDC Reporter – is hanging its hat on a possible longer term solution for BKCC that might involve being absorbed into its sister BDC by adoption : BlackRock TCP Capital (TCPC).
Yes, we’ve been muttering about such a combination for some time but that does not mean a merger might not eventually come through.
As with CPTA, we have all of 2021 to see if this prediction plays out.
If BKCC does remain an independent entity, much new business will have to be booked as management has sold its two largest investments in recent quarters.
Maybe we’ll learn more when BKCC holds its earnings conference call on March 4, 2021.
The biggest loser this week was Great Elm (GECC): off (7.25%).
If you go to the BDC’s website you’ll find nothing has transpired in 2021,whether in the form of an official filing; press release or insider sales or purchase.
We expect, though, some investors are worrying about what might be happening to the BDC’s biggest investment: Avanti Communications.
The BDC Credit Reporter brought to readers attention that Avanti might be facing financial difficulties again, after a couple of quiet years, which we expanded on in an article this week.
In fact, the b word (“bankruptcy”) has been mentioned, but in a British context as the company is based there.
We should hear in February if Avanti – and indirectly GECC – has met or failed this latest test.
If things go very badly for Avanti – and it’s hard to handicap given all the secrecy – the impact on BDC could be very material.
Like CPTA and BKCC, GECC is a BDC whose long term presence in the public BDC community remains in question.
To be fair, though, the BDC’s managers are a canny bunch and recently successfully pulled off a Rights Offering under difficult conditions, so we’re not writing them off by any means.
On the news front, with BDC earnings season still a week away, there was a decent amount of activity with press releases.
Besides BKCC discussed above, both Main Street (MAIN) and Golub Capital (GBDC) provided updates on new loan activity in recent months.
We discussed the MAIN announcement here , but didn’t have the time to comment on GBDC‘.
In a nutshell, the BDC indicated adjusted Net Investment Income Per Share is likely to be the same as in the IIIQ 2020 and NAV Per Share will be climbing 1.5%-2.0%.
This is all good – as they say – but no great surprise to the market which did not respond much to the preliminary numbers.
(MAIN did not get a significant bump from its revelations either).
The most important developments this week were occurring in BDC fixed income, but we’ll keep our discussion of the many changes going on there for our other weekly Recap.
As we’ve said, earnings season is around the corner, but looking at BDC prices we get the impression investors are feeling optimistic almost across the whole sector.
The good SAR report card and the early snapshots from MAIN,GBDC – and earlier – Horizon Technology (HRZN) – all suggest “everything is awesome”.
Of course, that’s when we’ve learned to worry the most because a few bad results could change the mood.
The next few weeks will be interesting.
Before We Go…
By the way, the BDC Reporter has been invited to discuss the big changes coming in 2021 to the BDC sector by Advantage Data.
We’ll be the guest speaker on Wednesday January 27th at 2:00 p.m. EST on a webinar entitled “Onward And Upward: Big BDC Changes Coming in 2021”.
Attendance is free and open to all.
We’ll be sharing lots of information mined from our coverage, including data about the Great Refinancing underway in the BDC sector and the changing credit picture.
2021 is going to be very different from 2020, and we’re going to explain how in very specific ways.
This includes our calculation of how much unsecured debt – public and private – is likely to be repaid in 2021 and 2022. (We’re talking multiple billions, spread over 31 BDCs).
Also we’ll share that cheatsheet about which BDCs might be leaving the stage in the year ahead.
We hope you’ll attend and feel free to ask any hard questions you might have.
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