BDC Common Stocks Market Recap: Week Ended July 31, 2020Posted on August 3, 2020
BDC COMMON STOCKS
The first week of BDC earnings season has come and gone, with 8 public entities reporting IIQ 2020 results.
The market – despite wide disparities in performance and a few surprises – was largely unperturbed.
For the week , BDCS increased to $13.64 from $13.55, a 0.7% upward jump.
The S&P – by way of comparison – was up 1.73%.
Of the 46 BDCs we track 25 headed northward in price and 21 headed south.
Eight BDCs increased in price by 3.0% or more and just five dropped by (3.0%) or more.
By the standards of the last few months this was an abnormally “quiet” week where individual price volatility was concerned.
For the record, the Biggest Winner was Newtek Business Services (NEWT) – up 7.6%.
The BDC has not yet reported quarterly performance but the prior week’s announcement of an unexpectedly high distribution may have helped the price.
Also, the news that the Payroll Protection Program (PPP) will be going into extra innings – so to speak – may have helped the stock.
Investors know only too well that its front end fees from the PPP that has kept NEWT’s earnings buoyant.
At first, we and and everybody else, expected the PPP to be over by June.
Then there was an extension to August and now a smaller PPP may continue to help the most troubled smaller companies.
Interestingly, the second best performing stock was BlackRock Investment (BKCC) which did report results.
Performance was poor, but concentrated in two portfolio companies (including the huge investment in asset-based lender Gordon Brothers, which had to be rescued by BKCC).
With “non core” assets – on whose underperformance all of BKCC’s troubles have been laid – down to 11% of the portfolio, investors seem to believe a rebound is around the corner.
Color Us Skeptical
The BDC Reporter, though, has trawled through the BDC’s economics and portfolio and is far from convinced that a corner has been turned.
Maybe investors believe – not unreasonably – that BlackRock cannot afford to allow one of its public vehicles to tank and will take some action to rescue BKCC.
Our money is perpetually on a merger of the troubled fund into better performing into BlackRock TCP Capital (TCPC).
More Than One
Still, there are other ways to rescue this ever shrinking veteran BDC whose portfolio assets have dropped to $644mn and the market value of the stock to just $173mn.
Many years ago, when the BDC Reporter was much younger, BKCC was one of the leading players in the public BDC sector, with its unusual combination of asset manager BlackRock and PE group Kelso.
(Back in 2007, the market value of BKCC’s stock was $867mn).
Now that BlackRock has got its name alone on the door (even though the ticker hasn’t changed), it may be time to make a change.
On the other hand, we could have said as much two years ago – and probably did – but nothing has happened.
Hanging In There
Still, at this point BKCC is barely paying a distribution as 80% of the $0.40 annual payout is in the form of additional stock and only $0.08 is in cash.
We will remind the historians amongst our readers that at its height the cash dividend was $1.72 a year.
BlackRock has been generous in waiving fees left, right and center and promising that salvation – or at least stability – is coming but more deliberate action may be needed.
On the downside, Capitala Finance (CPTA) investors lost their nerve again this week, just days after ramping up the BDC’s price for no good reason.
As we wrote during the week in the BDC News Feed, CPTA managed to reach an all-time price low this week at a time when all the rest of the public BDC universe has moved away from their direst levels.
On the week CPTA was down (9.5%) and closed at $2.19.
The second worst performer on the week is also one of the best performers of 2019: Gladstone Investment (GAIN).
As discussed on these pages, the IIQ results were below expectations in terms of earnings; unrealized losses and credit performance.
For the first time in a long time, doubts emerged about the ability to maintain its previously very stable payout level.
Most at risk are the semi-annual special dividends that were funded from the BDC’s many realized gains being slowly paid out to shareholders.
Even the $0.84 a year regular distributions – paid monthly in $0.07 increments – are questionable.
Whatever GAIN’s historical track record or high hopes for the future, this was unacceptable news to many shareholders who brought the stock price down (8.9%) this week.
However, the writing had been on the wall for some time.
GAIN peaked in the post-Covid period at $11.51 on June 3 and was already at $9.96, i.e. (13%) down before the earnings release came out.
With the post-earnings drop, GAIN has lost more than a fifth of its market value in a two month period, and could drop further if those dividends do get reduced.
The GAIN story is a potent reminder that behind the relatively tepid sector price changes of the last few weeks, individual BDCs can undergo dramatic shifts as investors try to get ahead of the news – both good and bad.
Unfortunately for BDC investors – unlike anyone invested in the major indices – we’re going to have to see some sustained and broad based BDC price increases to get out of the red.
We’ve been looking at the 12 month performance for the sector on Seeking Alpha’s excellent data table that we’ve created by adding in all 46 BDCs.
The table shows that exactly zero BDCs can boast of having a stock price higher as of July 31, 2020 versus the same day last year.
YTD, the picture is similar, except that the losses are even higher on average.
Casting our eye over the price change columns, it appears that no BDC even on a “Total Return” basis (which includes dividend paid out) is in the black in 2020.
Best In Show
Even Horizon Technology Finance (HRZN), which again reported positive results this week; and has maintained its dividend and increased its portfolio is still down (8.9%) in price YTD.
Maybe more disturbing is that 35 BDCs are trading at a discount of (25%) or more in 2020 thanks to the impetus of Covid-19.
For most BDCs, if prices do not move up materially, many years will have to pass for shareholders to make up in dividends what was lost in a few days in March 2020.
Most worrying of all is that one-third of BDCs are trading (when adjusting for BDCs that have undertaken reverse stock splits) at prices below $5.0 a share months after the crisis first broke.
With no end to the pandemic in sight and economic conditions likely to remain dire for a long time yet, the very real risk remains that a large number of players will be found wanting – unable to generate appropriate returns.
There are no alarm bells going off in BDC-land but there should be.
Even the more successful BDC managers must understand that an industry where a third of the players become unviable in a crisis is not good advertising for the sector as a whole.
We’ll be getting a clearer picture of where the industry stands this coming week when several larger, well known players report.
Disclaimer: 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.
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