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BDC Common Stocks Market Recap: Week Ended January 24, 2020

Posted on January 27, 2020

BDC COMMON STOCKS

BDCs: SAR, MVC

Bam !

The BDC common stock sector – like the markets generally – was marching upwards once again all week following the MLK closure before hitting a wall on Friday.

At least, that seems to be what the path of the Wells Fargo BDC Index seems to suggest.

That “total return” index dropped to 2,949.62 from 2,970.07 on Thursday January 23, 2020.

For the week, the index was down (1.03%).

[For some reason,  BDCS – the UBS Exchange Traded Note we also use to track BDC sector price changes increased on Friday even though 80% of the individual securities were down].

Also down on the week was the previously indefatigable S&P 500, off by (1.03%), much more than the (0.31%) of the Wells Fargo BDC Index.

Viral Story

All this – as our readers must know – is due to understandable concerns about the Chinese coronavirus, and the possibility of it’s becoming a global pandemic.

Here is one story – out of thousands – that gives a sense of the growing foreboding that is just now affecting the markets.

Frozen

Where the BDC sector is concerned, the rest of the weekly metrics confirms that the slow moving rally has been put on pause.

Investors seem to be watching and waiting, both for more news on the impact of the virus and – more prosaically – for BDC earnings season, which is approaching fast.

This week, only 1 BDC moved up 3.0% or more in price and that was one of two funds (along with Saratoga Investment or SAR) that has already reported results: MVC Capital (MVC).

As the BDC Reporter made clear when MVC’s 10-K and earnings press release were published, the quarter’s performance was GOOD, and investors seem to be reacting accordingly.

For the week, MVC was up 4.0,% and 4.2% since the earnings release.

At the other end of the scale, there was only 1 BDC down (3.0%) or more and that – interestingly enough – was SAR.

That BDC’s quarterly performance was even better than MVC’s, which had caused the stock price to reach a high of $28.49 on January 13, 2020.

Since then, though, the BDC paid out its $0.56 dividend and profit takers did what they do, pushing the price to a close on Friday of $26.71.

Even adjusting for the distribution that’s still a (4.6%) drop.

At this point SAR has given up virtually all the boost that followed its VERY GOOD results – as per our summary – that occurred on January 8, 2020.

Out Of The Ordinary

All the other 43 BDCs moved in a narrow range through the week.

We’re not drawing any broad conclusions from the Friday fall back, but it’s been some time since we’ve seen so much red on our screen.

For nearly 4 months – using the Wells Fargo BDC Index as our measuring stick –  we’ve seen the BDC sector move up gradually – but inexorably in value.

At the peak of a just a few days ago, the index was up 9.6% from the start of the rally on October 3, 2020.

We may very well not be done, but for the moment, there’s a pause underway.

Not Much 

In terms of new developments, there is next to nothing to report in what was a 4 day week.

As we highlighted on the BDC’s News Feed, Alcentra Capital (ABDC) – soon to be submerged into Crescent Capital – announced a final distribution to come of $0.40-$0.50 per share.

That might have been higher than Alcentra-watchers might have been expecting, but is still just an estimate.

In any case, the more ABDC shareholders receive in the payout, the less they’ll get of Crescent Capital’s equity when the merger/acquisition occurs.

Still, the soon-to-be-extinct BDC’s stock price moved up through the week on the news from $9.22, to close at $9.48…

Bigger Picture

With the absence of much in the way of individual BDC company news, the BDC Reporter turned its attention to broader matters.

We were one of the first to comment on the news that a BDC-lobbying group was rebuffed by the SEC in its multi-year attempt to change the Acquired Funds Fees Expenses (AFFE) rule.

Reuters wrote an article on the subject as well a day later, which is worth reading as well.

Any one hoping for a boost to BDC prices any time soon from new rule-making by the SEC will have been disappointed.

Long Term 

We’ve been mentioning the AFFE on and off for years.

While hopes may have been dashed, our reading of the correspondence suggests there is still hope that this unnecessary obstacle to a broader BDC shareholder base may get removed.

It’s a pebble in the shoe of the BDC sector, but a big enough of one for a great deal of time and money having been spent by the large asset managers who support the lobbying effort.

In the past, Wall Street has bent Washington and the regulators – not always the same – to their will where changes in BDC regulations are concerned.

Of course, the most notable success story was the Small Business Credit Availability Act (SBCAA) in 2018, but there have been other smaller victories in years past.

We Bet

Our money – especially under this administration – is on a rule change on AFFE getting done before the end of the year.

Certainly, the market didn’t seem to care very much one way or another about the setback, as there was no evidence of any material price movement on the news.

However, we do expect that if the AFFE should be amended in a BDC favorable way that stock prices and multiples will be tangibly impacted.


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