BDC Common Stocks Market Recap: Week Ended June 11, 2021Posted on June 14, 2021
BDC COMMON STOCKS
Week Twenty Three
The Never Ending Story
As our readers will know, the BDC sector continued to reach new heights price-wise this week.
All the way through Wednesday, the price of BDCZ – the UBS Exchange Traded Note which owns most every BDC stock – kept on moving up daily.
We reached a ten day winning streak and on Thursday – on an intra-day basis – BDCZ reached its latest 52 week high point of $20.29.
At week’s end, BDCZ closed at $20.19, tied for the highest closing price in the past year.
Between last week’s close and this one, the BDC sector was up 1.05%.
That’s the fourth week in a row of higher prices.
In the last 12 weeks, we’ve only closed in the red one time…
Of the now 42 public BDC stocks we track (Harvest Capital has disappeared into Portman Ridge Finance – PTMN), 30 were up in price, or unchanged this week.
Some 7 BDCs increased by 3.0% or more, while none declined by (3.0%) or more.
That’s a rare occurrence historically, but has now happened two weeks in a row.
At a time of remarkable metrics, we’re most impressed that 38 BDCs are trading within 5% of their 52 week highs – including 22 whose price is above book – and 41 are within 10%.
(As mentioned before, the only BDC left out is Great Elm Capital – GECC – but that BDC’s price is up on the year).
It’s as if investors are buying everything without much discrimination…
This week alone, 19 BDCs reached new 52 week highs even though the upward surge in sector prices is essentially over a year old and this rally – except for a brief drop a few weeks ago – has been going since last Halloween.
The BDC Reporter has been through numerous BDC rallies (and slumps) before, but this one has an energy and resilience we can’t remember in prior periods.
There was a long period of rising prices between the end of the Euro-crisis in the fall of 2011 and November 2013, but there were several sharp downswings along the way.
This upward move has been almost unrelenting for months and months.
Of course, stock rallies are like snowflakes – each one is different from the other – as these heady days are proving.
If we compare the current level of BDCZ to its height reached just before the pandemic, the BDC sector is still slightly behind : (1.9%) when using closing day prices.
More useful – especially considering that BDCs pay out virtually all earnings – is the “total return”.
Using the Wilshire BDC Index – our new “go-to” source for this sort of data – the BDC sector’s “total return” is up 19.7% between February 20, 2020 and June 11, 2021.
Increasingly, the impact of the pandemic on BDC prices and financial results is fading.
Comparing individual BDC prices at the end of 2019 against their current level, we find a majority (23 of 42) higher as of now, as illustrated in the BDC:NAV Change Table.
Only 11 BDCs can boast NAV Per Share is higher as of the IQ 2021 compared to IVQ 2019, but investors are looking ahead and liking what they think they see.
From The Watchtower
As we’ve said before, we see no catalyst yet on the horizon that might cause a significant pullback.
Admittedly, some investors might be surprised when IIQ 2021 results are published that earnings at many BDCs might be stagnant or drop slightly.
The furious level of new investment activity in the leveraged loan market has dropped off, which will cause many BDCs AUM to stagnate or drop.
Likewise, arrangement fees will be impacted with lower volumes.
Also, the BDCs this time last year were charging many companies significant fees for amending loan facilities and/or advancing new funds, which is no longer happening.
New loan activity in most cases appears to being booked at lower yields than BDCs average due to the impact of lower LIBOR and spread narrowing in a highly competitive environment.
As a result, neither the BDC Reporter – nor the analysts, judging by the IIQ 2021 consensus estimates we’ve seen – are expecting much – if any – growth in recurring income in the short or even medium term.
On the other hand, we do expect NAV Per Share to mostly increase across the BDC universe
We’ve just come off a quarter where every BDC reported higher net assets per share than in the prior quarter, and we might have a repeat in the IIQ 2021.
(A subset in that category is the energy sector – still a component on many BDc balance sheets – benefiting from higher oil prices from a valuation standpoint).
The Big Kahuna
Credit continues to improve as exemplified by this extract from a Fitch Ratings leveraged loan default projection, published on May 20, 2021:
“The May TTM institutional loan default rate stands at 2.4%, down from 3.3% at April’s end, the lowest level since March 2020. The default rate has fallen for five straight months and is well off last October’s 4.5% peak. Fitch Ratings expects the rate to decline to 2% by the end of the second quarter, as $8.2 billion of volume from last June exits the TTM sample. By the end of July, the TTM default rate could drop to 1.6%, reaching lows last seen in September 2019. Our year-end forecast stands at 2.5%, though continuing strong economic performance could result in the rate finishing below 2018’s and 2019’s 1.8% marks”.
Of course, the BDC universe includes many companies which Fitch does not cover – including the lower middle market – but these positive trends seem to be occurring in all nooks and crannies of leveraged lending.
Case In Point
On Friday – as an example – the BDC Credit Reporter wrote about the acquisition of a portfolio company held by half a dozen BDCs by a special purpose acquisition company, or SPAC.
The acquiree is Global Knowledge (GK Holdings), whose debt has been greatly written down and which has been non performing for over a year.
As the BDC Credit Reporter’s article indicates, this seems to be an “all’s well that ends well” story for the company and the BDCs involved, which will involve receiving all capital invested back and reversing prior unrealized losses.
Anecdotally – if you just peer down the list of all the recent articles written by the BDC Credit Reporter – you’ll notice an unusually high proportion of “good” credit news.
In fact, we don’t remember any period since we started tracking the fate of underperforming BDC portfolio companies more than 5 years ago with so many credit stories trending positively.
In the past most every company that got into trouble ended up with some sort of material loss, when all was said and done.
That’s not the case currently (see also the recent Paper Source story) and this will boost the value of several depressed assets and boost NAV Per Share.
We’ll be curious to see if BDC common stock prices move up materially higher if we do get improved NAV Per Share metrics when results start to filter out in late July and early August.
Or will SOMETHING ELSE have occurred between now and then to impact investors ?
We don’t have any definitive answers but we are certainly living in interesting times and any number of outcomes are possible.
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