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BDC Common Stocks Market Recap: Week Ended May 14, 2021

Posted on May 17, 2021
BDCs: Multiple BDCs 

BDC COMMON STOCKS

Week Nineteen

 

Stranger Things

The week ended May 14, 2021 was a strange one where BDC prices were concerned, and gut-wrenching for any investor long the sector.

For three days, the BDC sector went sharply down in value and transaction volumes began to increase – like a snowball rolling down a mountain, gaining in size.

As of the Wednesday close, BDCZ – the UBS Exchange Traded Note which we use to track BDC sector price momentum – had fallen to a price of $15.90.

That was (5.5%) below the level at the prior Friday close, and quite a distance to fall in such a short time.

All Over

Technically for the BDC Credit Reporter the big downward move – which was (6.2%) off the 2021 YTD high of $19.59 – represented the end of the BDC rally that began in late October 2020.

We use a (5%) downward move from a recent high as a triggering point, as discussed in the BDC Market Agenda written at the open on Thursday.

Changes

Then something curious – but strangely familiar happened – the markets had a change of mind.

On both Thursday and Friday, BDC prices began to rise again, and sharply.

By Friday’s close, BDCZ was back at $19.04.

The ETN dropped (1.2%) on the week.

That’s the same percentage as the S&P BDC index – using the “total return” – calculation.

Context

For those of us who keep track of such things that was the biggest single week percentage price drop for BDCZ since the week ended January 29, 2021.

Still – thanks to that change of heart in the last two days – the overall damage was relatively modest.

BDCZ settled at a price last seen in mid-April 2021, but still up 17.3% YTD.

Down And Up

As you’d expect there were many more individual BDC stock prices in the red (33), but 10 still managed to eke out a gain.

10 BDCs in the red saw their price drop by (3.0%) or more, the highest number since we experienced a similar – if less dramatic – market tremor in the week ended March 19,2021.

 

Damage Analysis

Yet, at the end of the day, the BDC sector price metrics were not too greatly affected by what seemed at one point a major downdraft.

15 of the BDCs continue to trade at or above book value, down from 18 the week before and 16 two weeks ago.

25 BDCs continue to trade within 5% of their 52 week highs (including Newtek Business or NEWT which set a new one year high during all the commotion).

Overall, 40 BDCs trade within 10% of their 52 week highs.

Using a 50 day moving average price, 25 of 43 BDCs are still up in price and using a 200 day calculation the number is 42…

BDC investors have ended up the week both shaken and stirred, but only marginally impacted.

Insert Dog And Tail Analogy

As to the reason for all the drama Monday-Wednesday, look to the broader markets.

Apparently – if we believe the financial press – investors began to worry about inflation, which caused the major indices to fall off, as CNBC explains;

The major averages experienced a roller-coaster week that saw the blue-chip Dow drop nearly 1,200 points from Monday to Wednesday. The S&P 500 and the Nasdaq fell 4% and 5%, respectively, during that period.

In these situations, whatever is happening to BDC fundamentals, our sector is at the mercy of larger forces, including – we believe but cannot prove – automated selling and the itchy fingers of investors wanting to be the first out of the burning building.

We’ve been expecting some sort of pull-back for several weeks as the rally was long in the tooth and these sharp downward jags after relatively gradual price increases are a feature of all public securities investing.

Our View

However, we’ve also been arguing that – barring some real and immediate cataclysm coming to pass – that BDC fundamentals are too strong at this time to allow prices to drop too much.

There is too much money on the proverbial sidelines willing to jump back in when some shareholders start to panic and offer up their positions.

With BDC earnings season almost over (just two players left to report and neither cause for concern), we can see from the BDC: NAV Change Table that EVERY BDC has reported higher NAV Per Share in IQ 2021 versus IVQ 2020.

(We’re including Sixth Street Specialty Lending – TSLX – because it’s drop in NAV is only the result of paying out a huge special distribution in the period).

We calculate that NAV Per Share was up 2.8% on average.

As importantly – as far as investors are concerned – this was the third quarter in a row of increasing net assets across the board, and not some one-time phenomena.

Furthermore, there’s every reason to believe that the rapid healing of BDC valuations that began after the IQ 2020 pandemic melt-down will continue in the current quarter and beyond.

Credit conditions continue to improve, boosting valuations of both performing and underperforming companies.

Then there are the distributions

Nine BDCs increased their most recent payout this quarter over the one before, either by raising their “regular” payment and/or their “special”.

There’s more of the same ahead as the BDC Reporter projects that at least a quarter of the BDC universe will report higher distributions for all of 2021 than 2020.

At this stage 20 BDCs are already trading at higher prices than at the end of 2019 and the number could go higher, and 11 boast higher NAV Per Share than before the pandemic.

With such a strong underpinning of book value, earnings and distributions ( a statement that cannot be made in every “hot” market right now) it’s hard to imagine BDC prices rolling back too far.

Of course, the BDC Reporter proposes and the market disposes, so we’ll see what happens in the weeks ahead.

Not So Bad

Maybe fear of inflation will bring prices back to earth after all.

However – as we’ve said before – higher inflation – especially if accompanied by higher short term interest rates – is no great negative for the BDC sector.

In fact, a rise in the Fed Funds rate and in LIBOR to 2.0%-3.0% would likely be a boon to most BDCs and send EPS and dividend payout levels shooting higher.

 

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