BDC Common Stocks Market Recap: Week Ended March 19, 2021

WEEK ELEVEN

Down To Forty-Three

The week just ended will be remembered as the one where the public BDC universe lost one of its own: Oaktree Strategic Income (OCSI).

The BDC was merged into its sister public BDC Oaktree Specialty Lending (OCSL) early in the week, as shareholders overwhelmingly approved the combination.

That brings the number of prices the BDC Reporter tracks in this column, and on our pages, to forty-three.

Off

This week was also notable that – for the first week in seven, BDCZ – the UBS Exchange Traded Note which we use to measure sector price activity – dropped in price.

Measured on a Friday to Friday basis, the step-down was modest: (0.2%).

However, the day to day price moves were much more pronounced, as this chart shows:

At one point intra-week, BDCZ fell nearly (3%), but rallied at week’s end.

The S&P BDC Index – using the “total return” calculation – was down (0.5%).

The downdraft was also reflected in the fact that 29 individual BDC stocks dropped in price in the week and only 14 were up or flat.

Of the 29 BDCs in the red, 11 fell by (3%) or more.

Biggest Losers

Down the most was Great Elm Capital (GECC), which dropped (7.8%) after reporting POOR results (by the BDC Reporter’s standard) in the week.

Here’s a link to our GECC IVQ 2020 Results Summary for anyone interested in a refresher.

Also down by a material percentage (6.5%) was BlackRock Capital Investment (BKCC).

Will They ?

In that case, the only development is that the BDC filed a Proxy for a “Special Meeting Of Stockholders”  whose only purpose is to gain approval to sell shares below book value if the Board and manager decide to do so.

There was no discussion on the most recent BKCC conference call of any interest by the manager in undertaking such a course of action.

As a result, some investors may be worrying – deservedly so – that the long underperforming BDC has chosen this moment to raise more equity capital after booking close to a half billion dollar in losses over its history.

The BDC is trading at a (22%) discount to book and would likely drop lower if such an initiative were undertaken.

However, the shareholder vote will not occur till May 3, 2021 and may prove to be just an insurance policy rather than an already decided strategy.

Running Some Numbers

Given the BDC’s low price and that the hypothetical offering can only be for 25% of BKCC’s current share numbers, we estimate the maximum new equity the BDC might raise would be about $63mn.

(That assumes a stock price of $3.0).

Given that the BDC has half a billion dollars in portfolio assets and cash that amount of new capital – even if leveraged – would not push the needle around very much.

Generally raising capital at a discount by a BDC that has been under-performing is highly unpopular with shareholders and it’s possible BKCC will receive a thumbs down once the votes are counted.

We will return to this subject as matters develop.

Last Shall Be First

On the positive price increase side, the biggest mover was tiny Harvest Capital (HCAP), which was up 4.0%.

The BDC is very shortly to be acquired by Portman Ridge (PTMN).

For your sake and ours, here is a reminder of the outline of the deal being offered HCAP shareholders, extracted from the original merger press release on December 23, 2020:

In connection with the transaction, HCAP stockholders will receive aggregate consideration equal to HCAP’s net asset value at closing. This consideration will be funded using PTMN shares (valued at 100% of PTMN’s net asset value per share at the time of closing of the transaction) and, to the extent the required number of PTMN shares exceeds 19.9% of the issued and outstanding shares of PTMN common stock immediately prior to the transaction closing, cash consideration in the amount of such excess. … HCAP stockholders will have an opportunity, subject to certain limitations, to elect to receive either cash or PTMN shares in consideration for their HCAP shares. Additionally, all HCAP stockholders will receive an additional cash payment from Sierra Crest of $2.15 million in the aggregate, or approximately $0.36 per share.

As this 2021 YTD chart of HCAP shows, the prospect of being acquired on these terms has grown ever more attractive as the day of reckoning nears, and is currently at a high of $8.59:

HCAP shareholders are expected to vote on the merger by the end of the IIQ 2021, and the move is expected to be easily approved.

Down, But…

Getting back to the BDC sector overall, although prices dropped this week overall month to date and year-to-date metrics remain very positive.

Seeking Alpha data indicates 42 of 43 individual BDC stocks are in the black in 2021 and 36 in the last 4 weeks.

Like last week, 16 BDCs continue to trade above book value, 37% of the total.

At the end of 2020 – with the rally ending its second month – the corresponding number was 9 and 7 as of Halloween 2020 when prices began to shoot up.

Furthermore, the S&P BDC “total return” index remains up 44.5% since the beginning of the rally.

Importantly, that index is only (2%) off the rally high set on Monday March 15, 2021.

The BDC Reporter typically calls an end to a rally when we witness a (5%) sustained downward shift.

That has not come close to occurring over this 20 week uber-rally.

Where things go from here is unknowable, but there’s no doubt that BDC investing has been a profitable exercise at whatever point one chose to get involved.

Newsreel

Outside of GECC, no other BDC reported earnings this week.

[Newtek Business Services (NEWT) will be reporting on March 22 and Barings BDC (BBDC) the next day. We’re still not sure when Oxford Square Capital (OXSQ) will announce.

With those three BDCs, IVQ 2020 earnings season will be complete].

Otherwise, most other BDC news in the week related to debt which we’ll discuss in the BDC Fixed Income Market Recap.

Credit News

However, in the credit arena Sixth Street Specialty Lending (TSLX) coincidentally had good news to report for two unrelated borrowers.

We wrote about the likely refinancing of Neiman-Marcus which should result in very early repayment of a still problematic credit and a realized gain.

Over at the BDC Credit Reporter, we wrote an update about American Achievement exiting Chapter 11 after a restructuring agreement was agreed.

That should reduce the number of non accruals on TSLX’s books from 2 to 1 and reduce the value of non-performing assets to zero as the other non accrual is Mississippi Resources.

Not So Good

That energy investment was the BDC’s biggest casualty of 2020 as TSLX took a ($32mn) realized loss as part of a restructuring.

That leaves TSLX with a $1.5mn Term Loan in the company with a FMV of zilch.

So (almost) ends a long relationship with the independent oil and gas exploration company that began in June 2014 that has been an unmitigated disaster.

Besides the 2020 realized losses, several others were taken in prior years for a total – by our count – of ($67.8mn).

Judging by the history of investment outstandings at Advantage Data for the company this suggests that TSLX – famous for getting itself out of tricky credits without loss – recovered no capital advanced.

Our View

For the BDC Reporter – always looking for lessons in these episodes – there are two morals to this story.

First – as we’ve said innumerable times before – investing in the energy sector – even in the form of first lien debt – is a mug’s game, except for specialist groups.

The hundreds of millions lost by BDCs should be sufficient evidence of that point.

Nobody’s Perfect

Second, the losses are a reminder that even the most respected and capable credit teams are capable of making outsized mistakes.

That includes the infamous “throwing good money after bad” as TSLX initially advanced $44.4mn to Mississippi Resources but ended up losing one and a half times that amount.

Rough With The Smooth

We’re a little disappointed that TSLX’s management – famous for its straight talking on conference calls and ruminating about all manner of things – has not undertaken a post-mortem on what went wrong with Mississippi Resources.

This single loss represents 7% of all equity ever raised by the BDC and deserves some after-the-fact discussion.

Otherwise BDC conference calls become nothing but infomercials, accentuating only the positive.

Or are we being naive ?