BDC Common Stocks Market Recap: Week Ended July 23, 2021Posted on July 26, 2021
BDC COMMON STOCKS
Week Twenty Nine
Frankly, after Monday’s price action when all the major indices moved downward substantially and the BDC sector fell (1.6%), we seemed to be in for a memorable week.
If you remember back, the markets were allegedly deeply worried about the latest wave of the pandemic and the drop in long term rates, which seemed to presage an unexpected drop-off in economic activity.
To add to the sense of panic oil futures dropped by their biggest daily percentage since September 2020, adding to the build up of dark portents.
For a moment we seemed to be headed for the sort of market correction that lowers all boats, including the BDC sector.
Of course – as readers already know – none of that happened.
Not Much To Write Home About
In fact, Week Twenty Nine of 2021 turned out to be an ordinary week, which left BDC investors pretty much in the same place they’ve been since the beginning of summer.
BDCZ – the UBS Exchange Traded Note which owns most BDC stocks and which we use as a price guide – ended up 0.36% for the week at $19.41.
That ended a two week streak of the BDC sector in the red.
The Wilshire BDC Index – using its “total return” feature – was up 0.31%.
Some 22 individual BDCs increased in price during the week, and 19 were down.
One. And Only.
Still, there was only one BDC which increased by 3.0% or more in price over the 5 days.
That was Stellus Capital (SCM), which increased by 4.9%.
That singular market enthusiasm for SCM should be no great surprise.
As we noted in Tuesday’s BDC Market Agenda, the BDC both increased its regular monthly distribution AND announced a “special” distribution in the IIIQ 2021.
If there’s one thing BDC investors appreciate it’s a (mostly) unexpected increase in a BDC’s payout level.
From a low point on 7/19/2021 – just before the announcement – SCM has jumped 8.6% in price as of Friday’s close.
Still, the markets are not completely surprised by this dividend increase, as the current price of $13.39 remains below its 52 week high set all the way back on April 15, which reached $13.75.
Currently, the yield on SCM – ignoring the special dividend – is 8.1%.
There were 3 BDCs that fell in price by the (3.0%) or more standard that we’ve set ourselves:
PennantPark Investment (PNNT), off (3.6%) and Saratoga Investment (SAR) and Horizon Technology Finance (HRZN), down (3.5%) each.
We have not heard anything material from any of these BDCs all week.
This suggests that the red ink could readily turn to black in the near term future as investors come and go.
For the record, SAR and HRZN are both trading less than (5%) off their 52 week high, but PNNT remains (13.8%) off that peak – the most of any BDC we track.
All In All
Despite the up and downs of SCM, SAR, HRZN and PNNT, we’d characterize BDC sector prices overall as very stable all considered.
The number of BDCs trading above book value was unchanged from the week before as are the number of stocks trading within 10% of their 52 week high.
BDCZ is up 19.6% YTD, and is only (4.3%) beneath its 52 week high.
More tellingly – given that dividends represent such an important part of BDC investors return – the Wilshire BDC Index is only (1.5%) below the highest 2021 Friday close we recorded, which was on June 11, 2021.
Yes, since the end of May BDC investors have experienced two material drawdowns in 8 weeks: one of (5.7%) and another of (6.0%).
However, these pullbacks have not lasted more than a week, followed by a bounceback.
Moreover, on a YTD basis, 39 of the 41 BDCS we track are up in price, of which 37 are up 10% or more.
In fact, the range of percentage price increase is remarkably wide: 6.85% to 76.18%.
All this to re-terate – Monday’s drastic price drop notwithstanding – what we said last week about the price outlook for the sector:
“… 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“.
That BDC earnings season is now upon us with at least 4 BDCs reporting results from July 27 on.
We quickly checked the analyst consensus for each and found that HTGC and OXSQ are expected to eke out small gains over their IQ 2021 results; ARCC is projected to be unchanged and HRZN down slightly.
Much more important will be what happens to net book value per share.
From our review of all 4 names, we expect to see higher values.
A Side Note
However, venture-debt BDCs can be subject to very sharp write-downs of assets if liquidity targets are not met.
For example, in the IIIQ and IVQ of 2020 – when most every BDC was reporting higher NAV Per Share, HRZN saw its metric drop from $11.64 to $11.02.
Admittedly, that has done little to discourage investors as this chart below shows.
Currently, HRZN trades 24% above its highest level pre-pandemic and at a 56% premium to par, despite booking substantial realized losses in all of 2021 and the IQ of 2021.
We’ll be curious to see if any NEW underperforming portfolio companies pop up on HRZN – or HTGC’s – radar.
Check Your Inbox Regularly
In any case – after weeks of not much news for the BDC Reporter to provide views and analysis of – the week(s) ahead should be busy and interesting.
We’ll be writing our regular daily Market Agenda, but adding full length feature articles if anything unexpected of material importance occurs at any BDC.
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