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

Ever Closer

With BDC IIQ 2020 earnings season just days away, BDC sector prices fell back in the week ended July 24, 2020.

BDCS dropped marginally in price to $13.55, a (0.44%) drop.

Overall, 24 individual stocks were down and 22 were up.

That’s not much of a difference, as investors settled in with their calculators and prior expectations to see what the next few weeks will bring.

Less

Missing this week, even though 17 BDCs overall moved 3% or more in either direction, were the wild swings of prior weeks.

Headed Up

In percentage terms, the biggest mover upward was FS-KKR Capital (FSK) up 6.7% on the week, 14.4% on the month but still down (36.9%) from February 20, the unofficial last day before the crisis began.

This very large BDC is trading as of Friday at a (35%) discount to book value.

It’s hard to know if this increased enthusiasm for the BDC are regular investors warming up in advance of the August 10 release or a boost from buybacks or FS Investment – KKR vehicles buying up shares.

Inevitable?

This week’s boost, though, cannot distract from the market’s apparent belief that (another) dividend cut is in store at FSK.

The current yield is 15.2% and the price to projected 2021 earnings is only 6.1x – both signs that the market is skeptical that the current earnings level or $0.60 quarterly payout can be maintained.

By contrast, Ares Capital (ARCC) is yielding 11.6% and its multiple is 8.2x.

(Not to say that doubts have not crept into the minds of ARCC’s shareholders.

Since June 8, the biggest BDC has seen its stock price drop -15%.)

Unusual

The biggest loser in percentage terms was Main Street Capital (MAIN), which was off (5.4%).

Doubts have arisen there since the BDC announced preliminary results on July 20, 2020 that spooked some investors.

The problem: MAIN’s preliminary Net Investment Income Per Share for the IIQ 2020 is about ($0.10) lower than in the prior quarter, and even more off its regular distribution level.

Even NAV Per Share – bouncing back by a material percentage at several BDCs that have been kind enough to offer up early estimates – is barely increasing over the depressed IQ 2020 levels.

Losing The Faith

Some of the more fickle MAIN shareholders are whispering sotto voce that the BDC’s days of ever increasing EPS and distributions may be over and its famous premium (still the biggest one out there at 45% over book) is unfounded.

MAIN has dropped (16.6%) since June 8 when everyone was much more optimistic.

MAIN still yields just 8.2% and is trading at a multiple of 14.0x 2021 projected Net Investment Income Per Share.

Just A Sampling

Everywhere you look there are BDCs moving up and down in price as BDC investors try to guess how the cookie is going to crumble.

Beyond

The BDC Reporter’s only contribution to this tale as old as stock markets is to remind investors that what is happening on the credit side over the long term is much more important than where earnings might end up this quarter.

Investment activity is low; repayment activity too, and the number of exits from investments sharply off; LIBOR is scraping the bottom and new borrowing costs are higher than before.

All of these factors will weigh on every BDCs earnings for several quarters to come but are not permanent fixtures.

When market conditions normalize the BDCs that have not been traumatized by credit losses and have dry powder to spare could see earnings return to or exceed prior levels.

Yes, really.

We won’t be running to the P&L when BDC results come out this quarter and for the rest of 2020 but to the “Consolidated Schedule Of Investments”.

That’s where the future of FSK, ARCC, MAIN and the rest of the BDC universe will be decided.

Secretive

In that regard, and despite several “earnings previews” , we’ve learned very little from the BDC confessionals heard to date.

Thirty eight BDCs have not revealed anything at all about their IIQ performance; eight have and only two of those have spoken to the performance of their portfolio companies.

Stellus Capital Management (SCM) – as we’ve reported previously – let us know that no new loans went on non accrual since April 1.

This week, Sixth Street Specialty Lending (TSLX) was the most forthcoming of all about providing some color about its underperformers.

In its IIQ 2020 Business Update, TSLX divulged the following:

Non-accruals increased slightly from approximately 0.1% to 0.4% of the portfolio by fair value at quarter end. This was driven by certain tranches of debt investments in two portfolio companies: the $1.0 million principal amount of Neiman Marcus 1st lien term loan and the residual non-DIP roll up portions of our J.C. Penney 1st lien term loan and secured notes totaling $19.4 million principal amount. It is worth noting that while we received the regularly scheduled cash interest payments on these investments during the quarter, given the high probability of a less-than-par recovery, we have applied these payments towards the amortized cost of the loans, instead of recognizing them as income during the period.

That’s the kind of intra-quarter update we’d like to hear from all BDCs, but do not.

The result is that investors are left guessing as to what investments might be tripping up and which not, adding volatility to an already overly volatile industry.

First Up

In the week ahead there are 8 BDCs reporting earnings: OXSQ, GAIN, HRZN, BKCC, GLAD, HTGC, SCM and OFS.

We did a little calculating and found that their average stock price drop since 2019 year end is (35%), equal to the BDC average.

Furthermore, all eight dropped in price since June 8,  which was a high watermark for the sector.

A couple of the BDCs (GLAD and HTGC) are trading above book value, HRZN is very close but BKCC is valued 55% below.

Five of the eight have already reduced their dividend.

Unchanged are GAIN, HRZN and HTGC.

We don’t expect a payout reduction to be announced from the remaining three in this quarter, but one cannot be certain.

Three BDCs are trading under $5.0 a share, with BKCC at only $2.42; OXSQ $2.76 and OFS at $4.21. 

We will be learning a great deal about all the reporting BDCs, some of which we have not heard not a peep from in months.

The BDC Reporter will update the BDC: NAV Change Table as the results come out and offering first cut analysis on the new BDC News Feed pages.

Of course, we’ll be reviewing the highlights and lowlights in the Market Recap at week’s end.

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