BDC Common Stocks Market Recap: Week Ended July 9, 2021Posted on July 12, 2021
BDC COMMON STOCKS
Not So Bad
With the benefit of hindsight – and looking at the metrics – the volatility in BDC prices was not so bad in the week ended July 9, 2021.
After a quiet start to the post July 4 holiday, we did have two days of consecutive red ink where BDC prices were concerned, but much of that was recovered on Friday.
By week’s end, BDCZ – the UBS Exchange Traded Note which owns most BDC stocks, and is our guide to sector performance – was off only (0.15%) the pre-holiday closing level.
That’s largely because the major markets – whose movement affects BDC prices – had a moment of self doubt, but then pushed back to new highs.
The S&P 500 ended the week – once again – close to its highest level and up 0.40% over the week before.
The “Great Market Crash of 2021” that some doomsayers have been predicting for months once again failed to occur.
As a result, the BDC sector continued to perform pretty well and ended up just (1.6%) off its 52 week high price, using BDCZ.
The Wilshire BDC Index – on a “total return” basis and using the weekend numbers – is only (0.75%) beneath its highest level.
On a YTD basis, BDCZ is still up 23%.
Getting Into The Weeds
Of the 41 individual stocks we track, 20 were up in price or unchanged from the week before and 21 were down.
Price volatility amidst these 41 stocks was relatively modest compared to prior periods.
Three BDCs increased in price by 3.0% or more and none moved down more than (2.4%).
In fact, during the period the number of BDCs trading above book value increased to 18, from 17 the week before.
Going back to the BDCs up in price by 3.0% or more…
Leading the way was Investcorp Credit Management (ICMB). For the week, this small BDC was up 8.0%. See a 1 month chart below by way of illustration:
As we discussed in the BDC Market Agenda for Friday, the BDC Reporter has no idea what has suddenly taken the fancy of investors.
Nonetheless, such a substantial change in price – accompanied by a big step up in the volume of shares traded – makes this noteworthy and something we’ll be tracking in the week(s) ahead.
Up 5.8% on the week was Capital Southwest (CSWC).
Even more than ICMB, the growing mid-sized BDC was an object of investor doubt of late, followed by a substantial rebound in price as this 3 month table shows:
From a high on June 8, CSWC lost nearly a fifth of its market value by June 30.
Since then, CSWC has been on a rocket ship journey upward, capped off by this latest week’s jump.
As with ICMB, we have no explanation for either the move up or down.
All we can say that these two examples demonstrate the extreme volatility of some individual BDC stocks, which is a boon for speculators with the right picks and infuriating to long term holders.
Finally – and speaking of speculation —up 3.7% for the week was the former Capitala Finance, now Logan Ridge Finance (LRFC).
As we’ve noted before, the less is known about the new manager’s actions and intentions for this BDC, the more some investors are attracted to the stock.
As of Friday, LRFC closed (2.8%) off its 52 week high.
As long as general market enthusiasm remains strong, the BDC Reporter does not see any catalyst for any substantial (10% or more) drop in BDCZ, or BDC stocks generally.
This week’s quarterly results from Saratoga Investment (SAR) – which we reviewed at length – was more cause for reassurance than concern.
As we’ve been predicting in a more general fashion, NAV Per Share was up by 5.3% for the BDC and earnings jumped significantly above the prior period’s level.
As we’ve seen elsewhere – and throughout the prior quarter – no new credit troublespots emerged in the BDC’s portfolio.
We also heard from Horizon Technology Finance (HRZN) and Golub Capital (GBDC) this week about new investment activity in the IIQ 2021.
The information provided is carefully curated by the BDCs involved – which are more intent on marketing than in providing early disclosure to shareholders.
Nothing in the press releases of either BDC hinted at any problems that might impact investor enthusiasm, as we discussed in the BDC Market Agenda at the time.
Best Of Times ?
Still, there’s no doubt that market conditions for leveraged finance assets have long ago reached red hot status.
An article in the Wall Street Journal caught our eye this week which related to the junk bond market, but does speak to leveraged credit conditions more generally:
“A rally in corporate debt rated below investment grade has pushed yields to record lows around 4.54%, according to ICE Bank of America data, while consumer prices rose 5% in May compared with a year earlier. That marks the first time on record junk-bond yields have dropped below the rate of inflation, according to Bespoke Investment Group.
The move upends the conventional logic of investing in bonds, which are typically prized for protecting investors’ money. Junk-rated companies include those most likely to miss interest payments or go bankrupt. Buying bonds that yield less than inflation means locking in a loss.
At the same time, stimulus measures and the strength of the recovery have left the economy in an unusual place, with many expecting a rapid reversion toward the pre-pandemic era of slow and steady growth. In that scenario, inflation will moderate as the pandemic’s anomalies fade, leaving junk-bond yields again above the rate of price increases.
Gennadiy Goldberg, U.S. rates strategist at TD Securities, said the inversion indicates investors are chasing returns far and wide in a low-rate environment, even in riskier places.
“This is a function of too much cash in the system and too few attractive assets for investors to put their cash into,” he said.”
There are (at least) two ways to look at this.
The pessimist might see this as fair warning that investors have gone too far and a correction is inevitable.
An optimist might see this leading to more investors rooting around in alternative credit classes for better yields which might end up boosting BDC prices.
Despite an 8 month rally, BDC yields remain comfortably above the rate of the inflation and even offer – in some cases – the prospect of higher distributions down the road.
The BDC Reporter is both optimist in the short run and pessimist further down the road, but only when broader market enthusiasm wanes.
Even though BDCZ has increased by 120% since the depths of the pandemic, we believe the greatest likelihood in the short term is that BDC prices head higher.
Also plausible is that BDCZ will remain within the narrow price range that began in late May: between $19.58 and $20.29 – a range of just 3.5%.
As always individual BDC price ranges will vary, sometimes much more than the overall sector, providing opportunities for speculators and long term investors.
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