BDC Common Stocks Market Recap: Week Ended July 2, 2021Posted on July 6, 2021
BDC COMMON STOCKS
This was an important week where BDC prices are concerned – mostly because of the calendar.
As we discussed intra-week in the BDC Market Recap, Wednesday was the end of the month, the quarter and the first half of the year.
For the record, the price of BDCZ – the UBS Exchange Traded Note which owns most BDC common stocks – was up 0.45% in June, 5.90% in the most recent quarter and 21.20% since 12/31/2020.
Despite a hiccup between June 14 and June 18 – which we wrote about two weeks ago – BDC prices have held up very well from every perspective.
As the chart below shows, BDCZ has managed to outstrip all the major indices in 2021 – a rare feat and the more impressive as all are “on fire”.
The performance is even more impressive when we use the Wilshire BDC Index, which shows the “total return” YTD with half a year’s worth of dividends clocked to be 28.92%.
In The Black
As has been the case for sometime – and through Friday – all but one of the individual BDC common stocks – now 41 in number – are up in price in 2021.
Putting a foot wrong as a BDC investor – even if you joined the rally late or jumped on the wrong horse – has been well nigh impossible.
At the end of this week, 37 BDCs were trading within 10% of their 52 week highs, including 23 within 5% of that arbitrary but commonly used apex.
Tellingly enough, three BDCs even set new 52 week highs during the week, suggesting there’s still some upward momentum to prices.
The record breakers were Barings BDC (BBDC); Saratoga Investment (SAR) and PhenixFIN (PFX).
Probably not coincidentally, the first two BDCs both received an analyst’s blessing recently.
Worth A Flutter ?
PFX – which does not pay a dividend, has no secured debt, is shrinking in portfolio size and whose long term strategy and outlook are unknown – is a speculators favorite.
Given that PFX is trading at a huge discount to book value there’s plenty of room for the stock price to run up or down further, depending on what we learn in the future.
Two days into the second half of the year, the BDC sector – as measured by BDCZ – is only (1.4%) off its 52 week high of $20.29 set in June.
Or, put another way, just a 1.5% price move upward and we’ll be at a new price summit and a 2.2% increase will match the high point reached just before the pandemic for BDCZ.
(Of course, on a “total return” basis the BDC sector has already far outstripped the February 2020 level).
This performance is all the more impressive when you consider that 24 BDCs cut their distributions in 2020 versus the 2019 level.
For example, ARCC has traded as high as $20.10 of late, versus $19.24 at its pre-pandemic peak: a 4.5% increase.
Yet, total distributions paid out by the market leader in 2020 – thanks to no “special” payouts – dropped (4.8%) from the 2019 level and may not recover even in 2021.
As the BDC NAV Change Table shows – see column G – 21 BDCs are trading at a higher price now than at 12/31/2019.
Some of the percentage price gains are spectacular.
A case in point is Newtek Business Services (NEWT), up 59%.
The pandemic – and the ensuing need for emergency funding for seemingly every company in America – has been a boon for the BDC, even as its bread and butter SBA lending business slowed down.
Also blazing through as if there was no crisis are the prices of all three venture-debt focused BDCs, led by Horizon Technology Finance (HRZN), which is 35% higher.
Not So Rosy
Which is not to say that every BDC has come through the 2019-2021 period unscathed from a price standpoint.
Of the 20 BDCs whose price has still not reached their 12/31/2019 level (as of July 2, 2021), there are 11 (10%) or more off.
Great Elm (GECC) – hurt by a dilutive Rights Offering and a (60%) reduction in its distribution – is the worst hit by this measure: (56%).
Logan Ridge Finance (LRFC) – previously Capitala Finance – has seen its stock price jump of late but still remains (49%) behind its level in 2019 when a dividend was still being paid.
Third worst is First Eagle Credit (FCRD) which – like Capitala – had to endure a change of manager and continues to be in turnaround mode.
FCRD is off (27%) in price and its dividend dropped (24%) between 2019 and 2020…
Just For Fun
Now let’s speculate a little.
Looking down the list of BDCs still in the red, we can reasonably expect that about half could be in the black by the end of 2021 by comparison with the 2019 price.
Some BDCs are very close in price to their 2019 level and may already have passed that threshold earlier this year and could do so again.
Even BDCs that have permanently cut their regular distributions – like Golub Capital (GBDC) – could still trade higher at year end 2021 than 2 years before.
GBDC’s dividend reduction – brought on by lower LIBOR and a Rights Offering – was only (10%) in 2020 versus 2019.
The 2019 price was $8.11.
With GBDC paying out $1.16, the implied yield is 6.4%.
That’s still way better than the yield for BKLN – which owns large cap floating rate loans and yields 2.9% currently.
Or, HYG – which holds “junk” bonds and is yielding 4.0%.
(We’ve calculated yield by annualizing the latest dividend paid out and dividing by the Friday closing price).
Anything can happen but in this low interest rate environment – and with little in the way of credit loss erosion to worry about – investors might be prepared to “pay up” for BDC stocks given the alternatives in similar instruments.
All Together Now
That might help the BDCs whose price remains below the 12/31/2019 level, as well as the sector as a whole.
We’ll find out soon enough if we see BDCZ – as well as the individual stocks themselves – move up in price above the hot house levels of mid-June when the sector peaked.
Maybe we’re being unduly optimistic, but the odds look good to us for another step up in BDC sector prices in the weeks ahead.
Stay tuned to the BDC Reporter’s daily and weekly writings for up-to-the-minute updates.
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