BDC Common Stocks Market Recap: Week Ended March 5, 2021

WEEK NINE

With An Asterisk

Yes, the stock price of BDCZ – that UBS Exchange Traded Note which we use to measure the price direction of the public BDC sector – was up 0.7% at the end of the week.

That’s the fifth week in a row where BDCZ has increased in price Friday-to-Friday.

Likewise, the “total return” price for the S&P BDC Index – which we also track weekly – was up 0.71% and also for a fifth week.

Nonetheless – looking at the BDCZ chart for the week and other data we collect – cracks are beginning to show in the BDC price rally that began back in late October 2020.

As this chart of BDCZ below shows, a high point was reached on March 3 and there’s been a drop-off subsequently:

BDCZ peaked at an intra-day high of $18.39, before closing the week at $17.87.

That’s (2.8%) down in just two days, and almost every BDC was caught in the downdraft as if someone had flipped a switch.

This often happens at the end of a BDC earnings season as analysts and investors have read the BDC’s cards – so to speak – and placed their bets.

Almost Over

As of Friday, 38 of the 44 public BDCs we track have reported IVQ 2020 results.

The six BDCs remaining (with the exception of Barings BDC – BBDC)  are all smaller in size and their eventual  fate – whether positive or negative – will not affect BDCZ much, if at all.

Some are not even included in the index.

Gut Instinct

We’re guessing that Wednesday March 3, 2021 might prove to be the high point of this long winded rally.

If we’re right,  this has been quite a ride for BDC common stock investors.

BDCZ closed October 30, 2020 at $12.94 and – arguably – peaked last Wednesday – at that $18.39 level.

Our calculator indicates that’s a 42% return.

We undertook a similar look back and calculation for the S&P BDC Index – which has slightly different constituents, weightings and methodology – and the increase was 43%.

Metrics

At this point, 13 BDCs are trading above book value.

Even more impressively, 23 BDCs are trading within 5% of their 52 week highs and another 10 between 5%-10%.

Furthermore – and according to Seeking Alpha – 41 BDCs are trading higher price-wise in 2021 than 2020.

Tops & Bottoms

Some of those increases in the first 9 weeks of this year have been monumental: as high as 32% (PSEC and AINV).

By contrast, the three BDCs in the red in 2021 are off by only modest percentages, a maximum of (3%).

For the record, these unfavored BDCs are Great Elm (GECC), Goldman Sachs BDC (GSBD) and Horizon Technology Finance (HRZN).

Punished

HRZN had a difficult week after reporting lower Net Asset Value Per Share for the IVQ 2020 and booking a large number of realized losses.

As this 2021 YTD chart shows, the market mercilessly cut the BDC’s stock price by (13%) on the news.

However, the velocity of the drop probably has as much to do with the inflated expectations for HRZN that had built up in recent quarters.

At its peak price – just before the IVQ 2020 results came out – HRZN was trading for 12.5x its $1.20 annual dividend.

Back at the end of 2019 – before HRZN became an investor favorite and before the pandemic – that same multiple was 10.90x.

At the moment the multiple is still 11.0x, just about a full round trip to the pre-pandemic expectation for the BDC.

As the BDC:NAV Change Table shows , HRZN still trades at a 19% premium to book value.

Object Lesson ?

The HRZN story is a useful indicator for what we expect to see much more of in 2021.

Given that virtually every BDC has been running up in price,  every time there’s a stumble in operating  performance we’re likely to see a big, gut wrenching, price drop.

Moreover, we’re also likely to see much more downward price volatility in advance of future earnings as canny investors bail out of any BDC seen at risk of disappointing.

After all, with so many BDCs very fully priced, there’s more downside than upside for holders of most BDC common stocks.

Less Vulnerable

The good news, though, is that the number of BDCs likely to “surprise to the downside” seems low based on what we’ve seen from the 38 BDCs that have already reported IVQ 2020 results so far.

As a glance down the BDC: Latest Results Summary Table shows virtually every BDC reported GOOD results; Liquidity is GOOD and credit conditions are stable or improving.

We can’t yet offer comprehensive numbers but very few new non-accruals have popped up.

Deleting

In fact, the trend is generally that BDCs have been writing off or down their most troubled investments in a sort of year-end house cleaning.

For example, FS KKR Capital (FSK) – getting ready to merge with its sister BDC FSKR – recognized ($283mn) in realized losses in the IVQ 2020 alone, 58% of all write-offs taken in 2020.

The previously mentioned HRZN had accumulated $3mn in realized GAINS through September 2020 only to end up with ($15mn) in full year 2020 realized losses by December 31, 2020.

Speaking Very Generally

Peering into 2021, earnings seem likely to soften in the first half of the year as activity slows down from the frantic pace of the IVQ 2020, but most other metrics such expenses, asset values, non accruals appear to be improving.

There will be unexpected and unwelcome surprises – there always are.

However, if the almost completed IVQ 2020 results are anything to go by, situations like what HRZN experienced this week will be relatively rare.

Coming Up

Of course, BDC IVQ 2020 earnings season continues for those 6 remaining BDCs for at least 3 weeks more.

The biggest BDC yet to report will be BBDC on March 23,2021.

The BDC Reporter will be interested to hear about how the MVC Capital integration is going, but BBDC has already suggested progress is being made in the ten weeks since the transaction was completed.

Question Marks

Most intriguing will be to hear what the Capitala Group has in mind for its namesake BDC – CPTA.

What financing – besides a small secured Revolver – has the manager arranged ? What are the plans for the suspended distribution ? What is the current relationship with the SBA ? Is a new SBIC license on its way ?

Investors seem optimistic judging by the stock price which has nearly doubled since early November 2020, as this chart shows:

Where We Left Off

Finally, we’ll  be watching to see the overall direction of BDC common stock prices after this week’s mini-dramas.

Our experience suggests we may get our first week in the red since late January 2021 as some investors take profits and others watch and wait.

However, based on those fundamentals discussed above, we’d be surprised if any reverse was very long or very deep