BDC Common Stocks Market Recap: Week Ended January 29, 2021

WEEK FOUR

As Always

You know the drill: when the broader markets drop, BDC sector prices follow suit.

There are exceptions to this rule, but not many and not in the week ended January 29, 2021.

The S&P 500 index was off (3.31%) – its worst performance since last Halloween.

BDCZ- the UBS Exchange Traded Note which tracks most of the public BDC stocks – was down (2.5%).

The S&P BDC Index fell (2.6%).

That was the biggest percentage drop in BDC prices since … Halloween.

Apparently all markets are now joined at the hip.

Down & Up

Anyway, only 9 individual BDC stocks maintained or increased their price in the week while 35 dropped.

Furthermore, only 1 BDC went up more than 3.0% in the period while 11 dropped by (3.0%) or more.

That ties the worst showing achieved during the week ended December 11, 2020 and was the worst performance since … you can guess the rest.

Tops

The individual BDC worst performer was – very randomly – Saratoga Investment (SAR), off (12.5%).

There’s not been a new peep out of SAR since January 6, 2021 and we have no intel that anything untoward has happened to any of its portfolio companies.

Most likely, investors took profits when they saw the market tides turning.

As the chart below shows, SAR’s price surged 32% between October 29, 2020 – when the latest BDC rally began – and January 22 of this year.

From its highest intra-day heights, SAR has dropped (13%) as of the Friday close, another reminder of the volatility involved in BDC common stock investing in both directions.

Second

Also taking it on the chin from a one week price standpoint was Stellus Capital (SCM), down (8.45%).

Again, there’s been no market moving news at the BDC since mid-month and that was the issuance of new unsecured debt at a lower yield than previously.

Third

Coming in third was Horizon Technology Finance (HRZN), down (8.3%).

The last we heard from HRZN was when the BDC gave investors a preview of IVQ 2020 investment activity – but not earnings or bad debts in mid-month.

HRZN was – for much of 2020 – the top performing BDC stock thanks to an unchanged dividend and a stable NAV Per Share through the first two quarters of 2020.

Even some bad news on the credit performance front – and a drop in net assets – in the IIIQ 2020 did not do much damage to the stock’s popularity.

In fact, HRZN reached its 52 week high just a few days ago as the markets seemingly were not concerned about the IIIQ 2020 results, which we marked as only FAIR.

At this stage HRZN is off only (9%) from that highest point so everything is relative.

Mmmmh

We notice that the top 8 price droppers this week are drawn from the sub-$1.0bn in portfolio assets BDCs, and 9 of the first 10.

What to make of that we’re not entirely sure so we’ll let readers come up with their own theories.

Not Done Yet

This downward week – which will always be remembered for the Gamestop hijinks –  does not mean the BDC common stock rally is over.

We typically look for a (5%) reversal on the closing daily price of BDCZ to call an end to a rally and that hasn’t yet happened when we adjust for the recent dividend.

Furthermore, the concentration of the higher price drops in the more thinly traded BDCs suggest there’s not been an all-sector sea change in sentiment.

Likewise, the mood in the broader markets has turned darker only very recently and could brighten again.

Musings

What happens next week will be highly instructive for investors of all stripes trying to time these markets.

For BDC investors – as we pointed out last week – this rally is long in the tooth and BDC multiples are at post-Covid highs.

(However, thanks to this week’s drop there are now 11 BDCs trading 10% or more off their post-Covid highs versus 2 the week before).

We could as easily see a further drop in prices as we enter BDC earnings season as another step upwards.

What we don’t see coming our way – although there are no certainties in these things – is a major roll-back of BDC prices to pre-Halloween 2020 levels or further.

Investors may be jumpy and prices may be high but fundamentals are looking pretty good, which makes a major price drop unlikely.

Fragmentary

We’ve some incomplete – but still reassuring – confirmation that BDC financial performance is stable or improving from multiple BDCs in the past few weeks.

Either through press releases previewing IVQ 2020 results or by disclosures made in recent prospectuses or pronouncements by the like of KBW, we’ve heard mostly good news about what to expect for IVQ 2020.

We’ve heard – as mentioned – from HRZN, but also from or about  Ares Capital (ARCC); PennantPark (PNNT); BlackRock TCP  Capital (TCPC); BlackRock Capital (BKCC) and Sixth Street Specialty Lending (TSLX).

Both the BDC Reporter and most analysts seem to expect to see higher NAV Per Share in the IVQ 2020 and into 2021; an improvement in credit metrics and – at the very least – unchanged earnings and distributions.

Intriguing

Still, there are several BDCs that we’ll be especially interested in hearing about when the earnings deluge begins and whose IVQ 2020 results might tell us more than usual about their future outlook.

Here are the tickers of the 8 BDCs who we’ll be sure to set our alarm clocks for to hear what management has to say on their conference calls:

AINV,BKCC,CPTA,GECC,HRZN,PFX,NEWT and OFS.

Just from this fifth of the BDC sector we expect significant revelations – both positive and negative – when their cards are turned over in the weeks ahead.

We don’t have the space here to discuss each of these names in turn but we will seek to before their earnings are released.

In the past we’ve over ambitiously sought to write previews for every BDC we track and not succeeded given the scope of the project.

This earnings season we’ll limit ourselves to these eight names.

Keep an eye out for this limited series from next week.

One Month Down

Given that Friday January 29 was the last day of the month, we thought we’d conclude with a brief recap of the first month of the year.

The BDC Reporter has projected the “total return” for the sector will amount to 14.0% in 2021.

As of the end of January, the sector is ahead of that market at 2.2%, but these are early days.

Seeking Alpha tells us that three quarters of the BDC universe (34) increased or maintained their stock price in the month, and 10 were down.

The biggest loser in percentage price terms was GECC (-17%); followed by First Eagle Alternative Capital (FCRD); down (10%).

On the plus side, the biggest upward price mover was Oxford Square (OXSQ),- up 18%, both due to a rebound in the CLO market and reflecting the very low level the stock had reached.

In fact, all the 5 top price gainers are “troubled” BDCs, and renewed investor enthusiasm reflects the “bargain bin” diving that’s been underway for weeks.

We wonder if that popularity will survive the cold hard numbers that will shortly be revealed ?

February should be a very interesting month, both to see if the rally survives the current market dramas and thanks to everything we expect to learn from BDC earnings season.