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BDC Common Stocks Market Recap: Week Ended May 7, 2021

Posted on May 10, 2021

BDCs: CPTA, CCAP, FDUS, Multiple, TPVG

 

BDC COMMON STOCKS

Week Eighteen

Hanging In There

The first week of May was the busiest time for BDC earnings, with half the public universe reporting over 5 days.

However, there were no major surprises from the quarterly disclosures, and thus little in the way of individual BDC price volatility.

(We’ll be discussing the handful of exceptions to this statement below).

The sector – as measured by the Wells Fargo BDC-index driven UBS Exchange traded Note with the ticker BDCZ – closed the week $0.01 up on the week before at $19.27.

The S&P BDC index “total return” closed Friday at 292.42, just (0.06%) lower than the week before.

24 individual BDCs saw their price increase or remain the same and 19 went down.

Pretty Stable

Sticking with the low volatility theme, only 4 BDCs went up 3.0% or more in price and just 2 dropped (3.0%) or more.

At times in recent memory we’ve had several dozen BDCs move 3.0% up or down in the space of a business week.

Tops

This week, the top mover northwards was Capitala Finance (CPTA), up 11.2% to close at $21.85.

As regular readers know, CPTA is being taken over on the management side by Mount Logan, which we dissected at length in an article on April 23, 2021.

Since then, CPTA has filed its official Proxy to shareholders, which we’ve reviewed.

The Proxy is deafeningly silent about any evidence that the “independent” directors shopped the management contract of the BDC in the market for the benefit of the shareholders.

Furthermore, no official word – but much supposition – that the current manager is receiving some undisclosed emolument from Mount Logan for transferring the control of the BDC their way.

There are many millions of dollars of annual management and incentive fees in play where CPTA is concerned, and Mt Logan seems not to be offering any capital of their own to CPTA’s shareholders for gaining control.

As a result, shareholders are being asked to vote – in our opinion – on a very mediocre offer from the new manager that leaves tens of millions of dollars of value on the table.

Even after this week’s burst upwards in price, CPTA trades at a (51%) discount to book value.

Compare And Contrast

By contrast, Harvest Capital (HCAP) – which is about to be acquired by Portman Ridge, which is managed by the same group of managers as will be in charge of CPTA, closed at only a (21%) discount to book.

However, everything is relative, and with the choice of remaining under the Capitala Group’s failed tutelage or giving Mt Logan’s strategy and team a try, investors seem to be favoring the latter.

Unless some other contestant gets involved, there is going to be a vote by the end of May and a change of stewardship by summer’s end.

We may never find out what Mt Logan and the existing manager agreed upon – if anything  – to cause this transaction to happen, which is a sad reflection of the unregulated and sorry state of BDC governance.

From The Proxy

By the way, if you were wondering this is how many shares the “independent” directors of CPTA currently own of the BDC, as mentioned in the Proxy:

Independent Directors
R. Charles Moyer
1,368 *
H. Paul Chapman
1,666 *
Larry W. Carroll(5)
54,268 *

These directors seem to have sold two-thirds of their shares in CPTA since the date of the last Proxy on 3/13/2020 when they held 158,498 shares.

Also for the record, here is how much CPTA pays its “independent” directors to represent its shareholder interest:

Independent Directors​​​​​​​​​​​​​​​​​​​

R. Charles Moyer

​​​$125,000​​​​​—​​​​$125,000​

Larry W. Carroll

​​​$125,000​​​​​—​​​​$125,000​

H. Paul Chapman

​​​$130,000​​​​​—​​​​$130,000​

Second

Also up sharply on the week was Fidus Investment (FDUS) which gained 7.2%, but for an entirely different reason.

The BDC reported adjusted Net Investment Income Per Share way in excess of what the analysts expected.

Investors don’t seem to have noticed or cared that NAV Per Share at FDUS only increased by 0.6%.

This was enough to bring FDUS to new YTD heights as this chart neatly illustrates:

The BDC now trades above its pre-pandemic level, and despite having sharply cut its distribution in 2020 in anticipation of credit losses that never came to pass.

Downer

The week’s biggest price loser – and another indication that markets are being driven by earnings headlines – was TriplePoint Venture Growth (TPVG), which fell (6.7%).

Undoubtedly that drop is related to the lower-than-anticipated Net Investment Per Share posted by the venture-debt BDC, as we discussed in the BDC Market Agenda on May, 6, 2021.

In the prior quarter NIIPS had come in at a high $0.39, but analysts were expecting $0.32 this time.

Instead, the BDC’s NIIPS was $0.29.

Although all other metrics – and the long term outlook – remained unchanged and promising, some investors bailed on the news, knocking the stock price down (9.1%) from its recent high to the close on Friday.

That’s what happens when BDC stock prices are at these breathless heights – even a whiff of bad news can cause investors to hit the sell button.

Still – and for what it’s worth – the analyst consensus is for June 2021 NIIPS to reach $0.35, nearly 10% higher than they’s estimated the first quarter would be and 21% higher than the actual result.

We say – because of how venture-debt BDC accounting works – nobody can foretell the future NIIPS and we advise interested parties to look at a rolling twelve month average to get a better picture of earnings power.

Where We Are

As we enter week three of BDC earnings season, prices remain elevated, at spitting distance from their record highs set only the week before.

The S&P BDC “total return” index is only (0.9%) from its apex and BDCZ is (1.1%) off.

A whopping 34 BDCs are trading within 5% of their 52 week highs, and 41 within 10%.

Left Out

The only two BDCs barred from the market party room at this point are Great Elm Capital (GECC), (39%) off its 52 week high and – surprisingly – Crescent Capital (CCAP), off (11.6%).

Still, even GECC is trading at (84%) of book after reporting a 12.4% increase in this key metric in the IQ 2021.

CCAP has not yet reported IQ 2021 results and is trading at 89% of its year-end 2020 net assets and 9.90x 2021 projected earnings.

As is the case with several other BDCs, investors may be looking forward to future periods when temporary fee waivers will be coming off, threatening lower EPS and dividends.

In this case, the analyst consensus is for NIIPS to drop to $1.64 in 2022 from $1.79 in 2021, after reaching $1.80 in 2020.

That $1.80, though, was boosted by a generous, but distracting,  $0.48 per share of waivers.

Nonetheless, even at $1.64 in future NIIPS, CCAP’s  PE multiple is “only” 10.75x, hardly high by current standards.

For example, Golub Capital (GBDC) trades at 13.2x its projected 2022 NIIPS and Main Street Capital (MAIN) at 17.4x.

If CCAP reports strong numbers for the quarter, you might expect to see an immediate jump upward in its stock price.

The analyst consensus for the IQ 2021 is $0.47.

What’s Next

Historically, we’ve often seen BDC stock prices – following a run up as we’ve been experiencing – drop in price once earnings season comes to a close.

It’s as if analysts update their models and advise their clients to take profits and return at a later date.

As the season has progressed, we’re less certain that this phenomenon will happen this time because BDC fundamentals are so strong.

Many players – we’re still counting up exactly how many – are projected to continue raising their distributions as happened this quarter with Barings BDC (BBDC) and Oaktree Specialty Lending (OCSL).

Furthermore, all those new unsecured note facilities that have been put in place in recent months are a gift that will keep on giving in terms of lower interest expense for years to come.

Then there’s the important – but hard to quantify – benefit to BDCs from all that market enthusiasm on the equity stakes in their portfolio.

PennantPark Investment (PNNT) is the most eminent example of this phenomenon (NAV Per Share was up 13.2% this quarter) , but many BDCs have been – and will be – beneficiaries

First we’ll see unrealized gains and then actual realizations, which will generate capital to be re-deployed into yield bearing investments, and will boost EPS.

Also – thanks to the Fed’s generosity and the promise of a rebounding economy – credit troubles seem few and far between.

In fact, we’d say more companies are leaving behind “underperforming” status than are coming on, which will boost BDC net assets as valuations get upgrades.

Prospects for higher book value, higher EPS; stable liability management and – in many cases – room for AUM growth may keep investors – and ourselves – complaining about high prices but not ready to decamp.

After all, every other investment out there seems to be just as expensive, and at least BDC values are based on some very tangible foundations.

Let’s See

A little test of this viewpoint is seeing whether TPVG and CCAP’s stock price increases in the next few weeks above their current level as new investors come to replace the recent sellers.

We’ll offer those test results in  couple of weeks in this column.

 


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BDC Reporter Premium

Free 7 Day Trial!

If you are interested in comprehensive daily coverage of what’s happening in the Business Development Company sector consider becoming a subscriber to BDC Reporter’s premium services: “BDC News Of The Day”. We provide the only daily update on every material development at 45 publicly traded BDCs and for a very affordable monthly fee.

LEARN MORE AND SIGN UP
FREE 7 DAY TRIAL!

Disclaimer: The information on this blog site is for informational purposes only.  Advantage Data makes no representations as to the accuracy, completeness, suitability, or validity, of any information. Advantage Data will not be liable for any errors, omissions, or any losses, injuries, or damages arising from its display or use. All information is provided AS-IS with no warranties and confers no rights. Information is not and should not be considered professional financial investment advice. In all events, Advantage Data is not a broker-dealer, shall not operate as a broker or a dealer, is not holding itself out as a broker or dealer and is not engaged in the business of buying or selling securities or otherwise required to register with the National Association of Securities Dealers.


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