BDC Common Stocks Market Recap: Week Ended November 13, 2020

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Week three of BDC earnings season was also week two of a feverish rally price-wise.

BDCS – the BDC Exchange Traded Note whose price we use to track the sector – was up 5.9%.

The prior week BDCS increased 7.0%.

The Wells Fargo BDC Scorecard Weighted Index – which gives a “total return” – was also up 5.9%, and 7.8% the week before.

Long Time Coming

This has been the best two week performance since the initial rebound in April from the March lows.

42 of the 45 public BDCs we track were up in price.

Even more impressively, 38 were up 3.0% or more, of which 10 were in double digits.

The Last Shall Be First

The top price movers are a very interesting collection of some of the most (in)famous BDC underperformers of recent times.

Number One was OFS Capital (OFS), up 19.3%.

Following close behind was Great Elm Capital (GECC) – now with its third quarter results published – at 16.50%.

The bronze medal winner was Apollo Investment (AINV), which increased 16.2%.

Theme 

In fact, the first six top movers this week were BDCs that have performed poorly in recent years.

Maybe investors seeing valuations start to heat up for the better-performing names have gone hunting in the discount bin ?

In The Red

The only BDCs left out of all this positive momentum were Harvest Capital (HCAP); Medley Capital (MCC) and Crescent Capital (CCAP).

All three BDCs posted negative returns for the week.

Odd BDC Out

We understand how those first two names might still beg a question or two but the CCAP price performance is a little surprising.

The about-to-be-acquired BDC posted very solid results for the IIIQ 2020, albeit thanks to continuing fee waivers from the manager.

Maybe institutional investors remaining from the days when CCAP was non-public are using the opportunity to decamp.

(Over the past month CCAP is still up 7.0%).

Improving

Whether or not this BDC – and general stock market – rally is here to stay for the rest of 2020 is impossible to say.

However, we can report that this burst of enthusiasm – which follows a “chips off the table” period just before – means 39 BDCs are up in price over the last month.

Using the 50 Day Moving Average, 41 BDC prices are in the green and 31 if we use the 200 Day Moving Average.

Most importantly of all for BDC investors, the Wells Fargo index is “only” behind (12.5%) on a YTD basis after this fortnight of good feelings.

In Sight

There is still time in this miserable year for the BDC sector to narrow what were historic losses down to modest levels.

Heck, if we get this sense of optimism to continue despite the deadlock in Washington and a still rampant pandemic, we might even get a positive return on a total return basis after all.

(We doubt Vegas would take that bet, but never know).

Shocking as that seems given how deep BDC losses were in March and through most of the year – as regular readers can attest – that would be in line with the results in the broader markets and in leveraged loan prices.

The latter recovered back to positive territory on a total return basis some months ago; had a hiccup or two subsequently, but are back on the winning trail.

Surprise

Helping the BDC sector in particular – but also a factor in the credit markets generally – is that credit losses have not mounted up through the year as expected back when the crisis began.

We were one of the first commentators to warn of dire credit days ahead but also quick to point out months ago that matters were taking a turn for the better.

Cleaning Up

This quarter, we’ve seen a series of BDCs quietly booking hefty realized losses, mostly of investments brought low by the consequences of the pandemic.

At the same time, though, many underperformers have stabilized or actually return to normal “performing” status.

Reversing

Most of all – and anybody who wants to review the BDC Credit Table will see what we’re talking about – the number of new loans going on non accrual has dramatically slowed down.

Our data set is not complete but so far the net number of new non accruals is -6, as more companies come off non accrual than go on.

Some of that may be temporary, as the Payroll Protection Program (PPP) has undeniably kept some businesses operational that might otherwise have folded, but those funds may be running out.

Apparently there’s no chapter two as yet for the PPP, despite much hand wringing on either side of the aisle about the fate of small business in this country but that might change at any time.

However, most of the improvement in credit has come from the multitude of actions private and public companies – and their “stakeholders” – took, which is a potent reminder that the impact of this pandemic is not a forgone conclusion and does not rely exclusively on governmental intervention.

By The Numbers

We suggest readers look down column E in the BDC NAV Change Table. 

Overall, with none months of the year gone the average change in net assets per share is (12%).

That’s bad but not horrendous, and we still have one more quarter to look forward to.

Furthermore, the table shows there are 18 BDCs whose drop in NAV Per Share is (10%) or less.

Best of all, there are two BDCs (Saratoga Investment and Sixth Street Specialty Lending) who are doing better by this metric than they were at year end.

If we continue on the last two quarters path of improving asset values, the public BDC sector might yet – as a group – exit 2020 with only a modest loss of average NAV Per Share.

On The Fly Assessment

Just for fun, we reviewed the BDCs on the list one by one and estimate that 13 names are likely to be down by (10%) or more by year end 2020 compared to the year before, well under a third of the total.

Or, from another perspective, that suggests more than 70% of the BDC universe – if we are right – will have come through this most difficult year with only modest damage or even a little gain in NAV Per Share.

We’ll circle back in the new year to see how that plays out.

Coming Attractions

Looking forward, BDC earnings season continues a few weeks more, all the way to early December when Golub Capital (GBDC) is scheduled to report back.

We doubt what we’ll be hearing from the likes of Oaktree or PennantPark or even Medley will do much to change the direction of the sector.

Difficult

Much more important will be that ineffable factor: investor confidence.

After many months of stability between May and early October, we saw investors bid BDCS down (10%) in October and up over 12% in November so far.

It’s anybody’s guess – based on that schizophrenic recent performance – as to what we get next.

Above Notwithstanding

However, we will close by offering our own view that a further move up from here is the most likely outcome.

We’ll know if the BDC Reporter’s crystal ball was right or wrong in just 6 weeks….