BDC Common Stocks Market Recap: Week Ended March 12, 2021

WEEK TEN

Completely Wrong

The BDC Reporter was pretty certain last week that the BDC common stock price rally had peaked.

We said as much in our weekly recap.

That was apparently a signal for BDC investors to push the price of BDCZ – the UBS Exchange Traded Note which we use to measure sector price performance – to new highs.

In fact, BDCZ moved up in a straight line through the entire week, bringing BDCZ to $18.58 from $17.87 the week before and indubitably proving the BDC Reporter cannot call short term market changes.

The price increase was 4.0% in that brief period.

The S&P BDC Index – which provides a “total return” – was up 3.8%, but has different components.

All Together Now

40 of the 44 public issues we track were up in price.

A very impressive 26 stocks jumped by 3.0% or more, while only two dropped by (3.0%) plus.

Super Gainers

Two BDCs : Newtek Business (NEWT) and Oxford Square Capital (OXSQ) increased in price by double digit percentages: 16.2% and 10.9% respectively.

There were no developments at either BDC to point to which would explain such huge swings in sentiment.

Perhaps – where NEWT is concerned – the likely extension of the Payroll Protection Program (PPP) boosted the stock.

General Merriment

Overall, a third of the BDC universe is now trading above book value and every single BDC is priced higher than at the end of 2020.

Of course, the consistently higher path of BDC stock matches the direction of the broader market indices.

This week the S&P 500, the Dow Jones and the NASDAQ all found their way higher.

The first two of those indices reached multi-year highs during the week.

NASDAQ got there February 12, 2021 but has since fallen back, but was headed northwards again this week.

The BDC rally – using BDCZ’s price – is now up 40% since the beginning in late October 2020.

The S&P BDC Index – using the total return calculation – is up 45%. 

This is the Energizer Bunny of rallies – it just keeps going and going.

Compare

Admittedly, BDCZ remains (9%) below the level reached in February 2020 – just before the harsh reality of Covid-19 struck.

However, overall BDC distributions dropped (8%) in 2020 versus 2019.

Furthermore, the data we aggregate also indicates there was a (8%) drop in NAV Per Share in 2020 compared to 2019.

Adjusting for the losses in distributions and book value per share, we’d say the BDC sector is back to trading at its pre-Covid level.

Let’s not forget that just before the pandemic arrived on the scene, the BDC sector had been steadily rallying since Christmas Eve 2018.

Right at the end of that suddenly interrupted 14 month rally, we counted 20 BDCs (out of 46 at the time) trading above book value.

All this to say that the BDC sector – after adjusting for the lower earnings/dividends mostly brought on by lower LIBOR – is back to its peak levels.

News Front 

We heard from three smaller BDCs this week where IVQ and full year 2020 results are concerned: Capitala Finance (CPTA); Portman Ridge (PTMN) and Harvest Capital (HCAP).

[Appropriately enough, PTMN will shortly be acquiring what’s left of HCAP in its third acquisition since KCAP Financial was taken over by BC Partners and re-branded].

These are all smaller BDCs with under half a billion dollars in portfolio assets,  although not for much longer for PTMN.

All three BDCs are in transition, with PTMN growing; HCAP going away and CPTA continuing to shrink.

There were no great surprises in the numbers or on the conference calls.

As we’ve seen throughout BDC earnings season, the credit status of all the BDCs involved appears to have remained stable or improved by comparison with the prior quarter and the height of the pandemic.

Final Four

There are now only four BDCs left to hear from to close out the 2020 books.

Oxford Square (OXSQ) and Great Elm (GECC) are in the small BDC category but Barings BDC (BBDC) was in the $1bn plus BDC group as of September 2020 and has since grown by acquiring MVC Capital.

Newtek Business Services (NEWT) recently crowed about reaching $500mn in market capitalization and has $638mn in portfolio assets.

Great Elm Drama

No major announcements or changes are expected from this final four, but the BDC Reporter will be interested to hear how GECC’s transition into investing in financial services companies is going.

Recently there have been some wild swings in GECC’s price – and high share volumes.

Between February 25 and March 11, GECC’s stock price rose 32% from low to high, only to fall (10%) on Friday March 12.

This cannot be explained away by the ex-dividend date for the $0.10 distribution, but why the BDC is flapping around is unknown.

We may learn more once the most recent results are published.

BBDC does not report till March 23, and NEWT a day earlier and that should end IVQ 2020 BDC earnings season, just 7 days before the end of IQ 2021 !

Pretty Darn Good

Whatever the results of the final four, there’s no doubt that the IVQ 2020 closed out well for the BDC sector.

As the BDC: NAV Change Table shows 35 BDCs saw their NAV Per Share increase in the last quarter of the year versus the IIIQ, 6 were down and three have not yet reported.

(BBDC has provided preliminary numbers).

Compare that to the IQ 2020 when 43 of 44 BDCs reported a decline in this metric.

We’ve had at least nine BDCs announce dividend increases and no new decreases have been slated.

(Unfortunately, both CPTA and PFX continue to pay their managers but not their shareholders).

It’s no wonder that investors have piled into BDC stocks based on those sort of fundamentals.

Last Word

The key question is whether prices overall can still go materially higher: let’s say 5% or more.

We don’t think so,  but the markets unbridled enthusiasm – which has pushed some favored BDCs dividend yield into the under 7% annual range – should not be underestimated.

The next few weeks will be interesting in this regard.