BDC Common Stocks: Market Recap Week Ended June 5, 2020Posted on June 8, 2020
BDC COMMON STOCKS
You may have heard by now that just about everything on a stock market moved northwards this week.
BDC common stocks – and Baby Bonds as we’ll discuss later – were red hot as well.
Every BDC stock issue moved up in price on the week.
Oh, except for Portman Ridge (PTMN), which did not get the invitation and was unchanged.
Overall, the BDC sector – as measured by BDCS – was up 6.55%.
That’s even better than the S&P 500, which had been motoring ahead for weeks and was up 4.90%.
No less than 35 BDC stocks were up 3.0% or more.
The top three gainers on the week were Great Elm Corporation (GECC) up 42%; BlackRock Capital (BKCC) up 27% and WhiteHorse Finance (WHF) up 18%.
Everywhere You Look
Over the past 4 weeks, the Bulls have been in charge judging by the numbers.
All 45 BDCs we follow are in the black in this period of time.
Likewise, if we look at current prices versus the 50 Day Moving Average, 44 of 45 BDCs are up.
We’ve now been three weeks in price increase mode; totaling 17.55%.
No wonder we enjoy opening up our spreadsheet of BDC holdings every morning with the almost uncertainty that they’ll be higher by the close.
If we didn’t have charts like the one below showing how BDCS has performed since February 20 (last day before the markets started worrying about Covid-19), we’d imagine these were golden days for BDC investing.
The BDC sector – lest we forget – is still (28%) behind in this brief period.
Buy and hold investors who sat tight when the markets began to meltdown and are holding still are still sitting on unrealized losses close to 3 years of dividend returns.
When we compare current prices against the 200 Day Moving Average, only 1 is currently ahead – Horizon Technology (HRZN).
Furthermore, no BDC stock is trading within 5% or even 10% of its 52 week high.
Checking Our Compass
So where are we: on an upward path back to the pre Covid levels – like the S&P 500 which is just (5%) off its February 20 level ? Or just enjoying a Bear Market Bounce, as many pundits are warning ?
Or are BDC prices catching up with the (15%) drop in the average book value drop, and will end up somewhere between the February starting point and the March lows ?
We can’t say but can point out that we have not had three weeks in a row of rising BDC prices since December 2019.
Nor did anything much in the news flow during the week give us clear hints as to what to expect going forward.
For example, BDC giant Bain Capital Specialty Finance (BCSF) raised unsecured notes to boost its liquidity but had to pay through the nose (8.5%) for the privilege.
Yet, in the same week Hercules Technology (HTGC) – the leader in the venture debt space – raised its own 5 year unsecured notes for 4.3%.
The fact that any unsecured debt at all can be raised from institutional investors is in itself a Good Thing, and was impossible in March and early April.
The differential in pricing, though, suggests the providers of capital are by no means certain of the outlook.
Capital Southwest (CSWC) investors – the last BDC to report IQ 2020 results – appear to have reassured by the BDC’s results.
The BDC’s stock price is up 9.2% on the week, but was that just because of the broader market rally ?
Also occurring during the week were several dividend announcements.
Some were unchanged, some lower, but all – with the exception of CSWC which kept its payout unchanged through September 2020 – had been previously presaged in conference calls.
PennantPark Investment (PNNT) – as reluctantly promised – dropped its dividend to $0.12 a quarter from $0.18.
Oxford Square (OXSQ) went from paying $0.067 a month to $0.035.
Solar Senior Capital (SUNS) dropped from $0.118 a month to $0.100, or (15%), as previously indicated by management.
On the other hand, WhiteHorse Finance (WHF) maintained its $0.355 quarterly payout, while hinting heavily a cut was coming shortly.
Nor was the credit news during the week much influence on the market.
The drip drip of BDC bankruptcies continued with three in June so far, and two more additions to our Weakest Links list of companies expected to file for protection shortly.
The Long And Winding Road
In the background, the BDC Credit Reporter continued its Long March through every BDC’s IQ 2020 portfolio, updating our underperforming company list.
At time of writing, after many, many additions and a couple of deletions, total underperforming assets at FMV were $13.2bn, or 11.6% of total BDC assets.
We’ve identified – give or take – 554 underperforming companies so far.
Both the number of companies and the value of underperforming assets climbs daily as we drill into more BDC portfolios.
This week we completed our review of AINV, CSWC, CPTA and MCC.
We Are Not Alone
The much deteriorated BDC credit conditions reflect what S&P, Fitch and others are finding in the broader leveraged loan space.
This week S&P noted that 11% of all leveraged loans were rated CCC or lower, twice the level of last year.
Plus – in an impressive but not necessarily useful statistic – the ratio of downgrades to upgrades of all kinds in May was 43:1 !
The Above Notwithstanding
Yet – reflecting the mixed messages in the BDC sector – the S&P/LSTA US Leveraged Loan 100, which tracks the 100 largest loans in the broader Index, is up 1.75% in June.
More tellingly, given the disaster that was March, the YTD loss in this select group is “only” (4%).
Matching BDC and leveraged loan price levels with the much weaker credit conditions seems to suggest markets are not expecting too bad a bottom line impact by the time this all plays out.
That’s been the story in the broader markets – if the financial news channels are to be believed – for some time as well.
A V shaped recovery where only the already weaker credits and a small number of other companies who happened to be in the wrong place/sector at the wrong time seems to be the consensus right now.
After all, what has been downgraded can be upgraded.
For our part, we continue to lean towards a worser for longer scenario where BDC credit quality is concerned.
The availability of PPP financing; support from PE groups and even some lenders (always at a cost !) is mitigating the immediate blow.
However, unless we ramp back up to a level of economic activity close to equal to the pre-Covid-19 period, we expect credit losses to keep on growing. And growing.
Most every borrower is so leveraged that even partially bouncing back conditions will not be sufficient to allow many of them to meet their obligations.
With PPP essentially ended and the Main Street Lending Program more of a promise than a reality and with PE sponsor support able to do only so much, losses may mount.
Most BDC portfolio company balance sheets and cash flow projections were built on the expectation of more robust business conditions than we’re likely to have even with management and employees back on the job.
This week’s optimism – in our view – may prove to be misguided.
Given the way that these things play out, though, we may not even start to get a clear picture till the latter half of the second part of the year.
As Fitch warned in an earlier report, actual defaults may begin to peak in 2021.
If true, these are ingredients for a BDC price pull-back but when, how much and what the catalyst might be with sentiment so optimistic is impossible to say.
BDC Common Stcok Market Recap articles are written and supplied by Nicolas Marshi, the editor of BDC Reporter and BDC Credit Reporter.
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