BDC Common Stocks Market Recap: Week Ended July 16, 2021Posted on July 19, 2021
BDC COMMON STOCKS
Last week, the BDC Reporter wrapped up the Common Stocks Market Recap with a relatively bullish outlook for the sector, despite a modest pullback in the week.
As happens when we make these assertions – however hedged – the BDC sector – after an up day on Monday – headed south for the rest of the week ended July 16, 2021.
BDCZ – the UBS Exchange Traded Note which we use to measure sector price performance – fell (3.15%).
However, this was the week for BDCZ’s quarterly distribution, which came in at $0.371.
Adjusting for that payment, BDCZ was off (1.3%).
The Wilshire BDC Index that measures total return dropped (1.08%).
Not So Good
Furthermore, the number of BDCs that eked out a price increase or remained unchanged amounted to just 9 names.
That means 32 BDC stocks were in the red.
In this same vein, the number of BDCs trading within 5% of their 52 week high fell to 14 from 24 the week before.
Finally, the number of BDCs trading above net book value fell from 18 to 15.
All the above notwithstanding, we’d characterize the pullback as modest, and not necessarily indicating a fundamental and lasting shift in investor enthusiasm.
The main indices – shortly after reaching 52 week or all-time highs – also fell in price during the week.
The S&P 500 was off (1.0%); the NASDAQ (1.8%) and the Dow 30 by (0.5%).
As we’ve said previously: where goes the major indices, the BDC sector most often follows.
Against The Tide
Also cause for guarded optimism is that no less than 5 individual BDCs reached new 52 week highs this week, despite the tide pulling in the opposite direction.
We track this metric every week and found that Ares Capital (ARCC) – the largest BDC by size and market capitalization – reached $20.12 intra-day on Thursday.
That’s the highest price reached in years, and 5% higher than the pre-pandemic highs when the BDC was paying out a slightly greater dividend than today.
Also at a new peak was the well regarded Sixth Street Specialty (TSLX) which reached $23.97 on Bastille Day.
That was a 52 week and all-time high for the BDC, which trades at a 22% premium to par, and 11.7x expected 2021 Net Investment Income Per Share.
Not surprisingly if you’d read what we had to say after learning that Saratoga Investment (SAR) issued $125mn of new unsecured debt, that BDC reached a new high intra-day on Friday.
Armed with relatively inexpensive new capital to spend; a lower interest bill and much unused SBIC financing capacity, SAR trades at 13.1x its future projected earnings and 97.5% of book.
Also reaching new price heights 16 months into the BDC price rally were Investcorp Credit Management BDC (ICMB) and PennantPark Floating Rate (PFLT).
Where We Are
At this stage, the Wilshire BDC Index indicates the BDC sector is only (2.2%) off its highest level – set about a month ago on June 14, 2021.
Furthermore, 33 of 41 stocks are still trading within 10% of their 52 week highs.
Obviously those numbers are guarantees of nothing, and this price rally is admittedly long in the tooth by most standards.
Nonetheless, we continue to envisage that the outlook for BDC prices continues to be flat or upward headed in the months ahead, especially if IIQ 2021 results are positive as expected.
The biggest caveat that we’d offer up – and which we mentioned earlier in the week – is that a resurgence in Covid-19 could throw a spanner in the works.
The markets do not seem concerned about the increase in cases, hospitalizations and – in some areas – deaths.
However, should the pandemic result in a deterioration in economic activity due to private or public reactions to these unfortunate metrics, we might see the markets react negatively.
If that’s the case, all bets are off for BDC prices.
The Harsh Truth
Historically, investors have been very quick to abandon their BDC investments at even a hint that underlying economic conditions might deteriorate.
This is why you’ll see essentially every BDC – whatever their back story – drop in price in unison during times of perceived crisis.
The most egregious example was during the European financial crisis of 2011 – which caused absolutely no damage to BDC earnings or balance sheets.
Nonetheless, in anticipation of the possible crash of the financial system and its knock-on impact on us – BDC sector prices dropped (28%) in a few weeks.
When the all-clear sounded when Europe successfully kicked its fiscal troubles down the road, BDC prices came roaring back.
For a few week there, though, BDC prices imploded out of a clear blue sky, two years after a sustained rally coming out of the Great Recession.
For example, between April and late September 2011 ARCC – then as now the market leader – saw its stock price drop as much as (23%).
To make matters worse – as nobody seemed to be in control of the developing situation – the prices of BDCs fluctuated wildly up and down within this period.
After sharp drops would come weeks of revival that were followed by even sharper drops, which no BDC was spared.
(In the most recent Covid pandemic crisis, the rally that began in April 2020 mostly went straight up.
Investors who had jumped back in after prices dropped nearly (60%) rarely had to decide whether to bail a second or third time.
This contributed to the strength of the subsequent rally that has taken BDC sector prices back to above and beyond its prior high point).
For us, the 2011 European financial crisis was a very useful learning experience.
That’s code for admitting we were caught flat footed at times during this period and fared badly as investors.
We promised ourselves: “Never Again”.
In fact, one of our responses was to begin our tradition of keeping weekly track of BDC price developments in the wake of the crisis.
At times such regular focus may seem over the top or unnecessary.
Often – with the benefit of hindsight – that criticism is valid, but we’ve found it’s the best insurance we’ve found against being surprised by sudden shifts in market direction.
Given that BDC price drops can wipe out in a few days years of accumulated distributions earned, staying alert and being able to distinguish between fundamental and ephemeral changes is critical.
BDC investing can be very cruel – note the (36%) decrease in BDC sector prices between November 2013 and February 2016 or the sudden (15%) drop between early November and Christmas Eve 2018.
Let’s not also forget that in the Great Recession, ARCC saw its stock price drop from over $20 a share to under $4 within 2 years.
Many other BDCs fared much worse – and unlike ARCC – never did recover.
The price of being involved in this high yielding corner of the financial markets is eternal vigilance, and the willingness, – like Keynes – when the facts change, to change our mind.
At the moment, the BDC Reporter is relatively bullish for the rest of the year – this modest pullback notwithstanding – but nothing is written in stone.
In fact, as we’ve now seen on multiple occasions (and most recently on February 21, 2020) – sentiment can turn on a dime.
Through these weekly Recaps and our daily Market Agenda, we hope to give our readers as much of a “heads up” as we can.
BDC Reporter Premium
Free 7 Day Trial!
If you are interested in comprehensive daily coverage of what’s happening in the Business Development Company sector consider becoming a subscriber to BDC Reporter’s premium services: “BDC News Of The Day”. We provide the only daily update on every material development at 45 publicly traded BDCs and for a very affordable monthly fee.
Disclaimer: The information on this blog site is for informational purposes only. Advantage Data makes no representations as to the accuracy, completeness, suitability, or validity, of any information. Advantage Data will not be liable for any errors, omissions, or any losses, injuries, or damages arising from its display or use. All information is provided AS-IS with no warranties and confers no rights. Information is not and should not be considered professional financial investment advice. In all events, Advantage Data is not a broker-dealer, shall not operate as a broker or a dealer, is not holding itself out as a broker or dealer and is not engaged in the business of buying or selling securities or otherwise required to register with the National Association of Securities Dealers.
Are you using AdvantageData?
AdvantageData is your fixed income solution for pricing, analytics, reports, and insight on approximately:
- 500,000+ U.S. and international corporate bonds
- Over 300,000+ BDC fair value assessments dating back to 2000
- Over 22,000+ syndicated loans
- Over 100 equity markets worldwide
- One platform 15 products and services from debt to loans to mid-market
- Used by top buy and sell-side firms worldwide