BDC Common Stocks Market Recap: Week Ended March 26, 2021

WEEK TWELVE

Fake Out

At one point during Week Twelve of 2021, the BDC common stock rally seemed about to end.

As this chart of BDCZ shows – the Exchange Traded Note which tracks most BDC stocks –  prices sagged in mid-week:

Furthermore, as the chart also shows, volume picked up as the market timers packed their bags.

At one point, the gap between the highest point of the year of $18.95 and the low on Wednesday March 24 at $18.23 was (3.8%).

Then markets had a change of heart, pushing the BDCZ price back up, breaching the prior week close- an increase of 0.38% over the week before.

At this point BDCZ is just (1.7%) below its highest level of 2021 and still up 14.7% YTD.

From The Start

Since the beginning of the Halloween 2020 rally, the BDC sector is up 40.7%.

The “total return” – using the S&P BDC Index – is 45.5% over that same period.

The pot may have come slightly off the boil but 14 BDCs are trading above book value, out of 43.

Furthermore, an impressive 30 individual BDC stocks are trading within 5% of their 52 week highs, and another 10 are between 5%-10% of that summit.

Left Out

Only three BDCs have been left behind by this metric: PhenixFin (12.9%); Investcorp Credit Management BDC (13.2%) and Great Elm Capital (38.9%).

This has been one of the most universally inclusive BDC rally we can remember.

Being Controversial

However – and here we’ll go out on a limb – this lifting of almost every boat is unlikely to continue as the year plays out.

Now that the 2020 BDC earnings season is over, the BDC Reporter has been sharpening its pencil and projecting out BDC dividend levels one year hence.

Admittedly, a large number of BDCs are performing well and we expect 13 to increase their pay-outs over the next twelve months.

However, that leaves 17 BDCs we expect to leave their dividend unchanged and 9 that are candidates for a cut.

(There are already two – PFX and CPTA – which are paying out nothing at all).

The market is pricing in continued good results from almost everyone,  but that’s unlikely to be the case.

If we’re right and a fifth of the BDC universe (net of FSKR and HCAP, which are being absorbed) cuts its dividends at some point in 2021 can these “era of good feelings” continue ?

Of course, we could be wrong both about the dividend cuts and the market reaction.

As always, time will tell.

Top Dog

Getting back to the here and now: the week’s biggest winner from a price standpoint was Oxford Square Capital (OXSQ), up 10.95%.

The BDC reported results this week, including an 18% increase in NAV.

That metric only underscores how volatile investing in Collateralized Loan Obligations (CLO) can be.

Back in the IQ of 2020 – when conditions were at their worst – OXSQ led the industry with a (35.2%) drop in NAV Per share.

Even with this quarter’s rebound OXSQ has seen its NAV Per Share fall (39.7%) in the past three years, the sixth worst performance of any BDC.

Down

The biggest loser from a price standpoint was Sixth Street Specialty (TSLX) – still embroiled in a lawsuit with Dyal – off a material (6.05%).

However, the legal imbroglio is likely not to blame.

This was the week, TSLX’s massive special dividend of $1.25 reached its “record date” on March 25.

That followed the payment of the regular dividend of $0.41 and a $0.05 “special” in the weeks before.

At the moment TSLX – priced at $20.97 – trades at 10.5x projected 2021 earnings and (8.4%) below its dividend-fueled 52 week high.

Looking Forward

In the short term, as long as the broader markets stay healthy – the S&P 500 was up again this week and is up 5.8% for the year – we expect BDC prices to remain in a relatively narrow range.

The sector might make a new 2021 price high – all that’s required is a 1.8% move upwards – but more likely is that prices remain – using BDCZ and adjusting for the upcoming quarterly dividend – between $18.00-$19.00.