BDC Common Stocks Market Recap: Week Ended November 27, 2020

One More Time

In an otherwise miserable year for so much else, BDC investors had much to be thankful for this Thanksgiving week.

The headline is that the BDC common stock rally rolled on for a fourth consecutive week.

Rarely does the sector manage to maintain such upward price momentum, which is notable in and of itself.

BDCS moved to $15.22, up 0.66%.

The Wells Fargo BDC Scorecard Weighted Index jumped 4.64%.

(We can’t reconcile the two. The former we use to track price action and the latter “total return”).

Lockstep

Most impressively, every single individual BDC stock price we track – all 45 of them – moved up in the week.

We looked back through our data and found that the last time that happened was June 5, 2020.

Before this latest surge early June was when the BDC sector last rallied, reaching a high of $15.68 on June 8, 2020.

Despite all the buzz of the last few weeks, BDCS is not yet back to that prior, post-Covid high but we’re not far off.

Big Jumps

Also impressive this week – but probably influenced by lower than usual volume – was that 34 BDCs moved up 3.0% or more in price.

As in recent weeks, some BDCs that had been given up for dead came back to life price-wise.

Like A Rocket

Most spectacular of all was the price change at Harvest Capital (HCAP): up 66.2%, according to Seeking Alpha.

That impassioned advance seems related to a small news item that we did not even consider worth adding to our News Feed: the delayed payment of two monthly distributions.

Back during the height of the pandemic, HCAP made the understandable strategic decision to announce, but not to pay, its $0.08 per share March and April distributions.

If you look at the BDC Performance Table, we’ve registered the Dividend Status as “Deferred”.

Months later, and despite effectively losing its secured debt financing, HCAP has decided the time is right to pay its shareholders and avoid any “excise tax” on retained income.

This should not have been a great surprise to HCAP-watchers as management was already hinting on its November 6, 2020 conference call that the payments would be made.

Here’s the back and forth that occurred between the CEO and the KBW analyst at the end of the Q&A session:

Paul Johnson

Okay, good. Thanks for that color. And then lastly, I would just ask, do you guys have any update on the dividend as far as the dividends that were declared in first quarter? Is that something that you’re going to have to do anything about taking any action this year? Or are we looking you know, more into 2021 to resolve that?

Joseph Jolson

Well, it’s funny, you should ask that because we’ve been discussing that. And I think that depending on the state of our line in the next month and a half in terms of paying it down further type of thing. We may part with some of the cash we’ve accumulated and clean that up. Okay.

 

Convinced

Apparently that heavy hint was not enough at the time for HCAP’s shareholders which – before this announcement – had seen their stock price drop two-thirds, from $8.77 to as low as $3.11.

All that was forgotten with the $0.16 of dividends, and HCAP jumped to $5.02.

By Seeking Alpha’s records that represented a 66.2% positive weekly performance but still leaves  HCAP (43%) behind for the year – the third worst performance in 2020 of any BDC.

Rest Of The Best

Also up by double digits in price this week were Investcorp Credit Management BDC (ICMB), up 23.8%.

In fact – like last week – the top seven BDC positive price movers – all greater than 10% – were underperforming names.

Flip Side

Looking down this week’s price table, the BDCs with the smallest percentage gains are better performers.

For example, of the 3 top smallest price gainers, two (WhiteHorse and Crescent Capital) have maintained an unchanged distribution through 2020, and one has upped its payout (Barings BDC).

More Facts

Also noteworthy is that we’ve reached another milestone in terms of the number of BDCs trading above book value.

That number is up to 10.

Before the pandemic that number was twice as high, but we were at zero in early April and at 7 early in November.

Beginning Of The End

Naturally enough, the question on most BDC investors mind this week –  and every week –  is what comes next ?

There are just four and a half weeks left in the year.

There seems to be little chance BDC common stock prices – as measured by BDCS – will make up the terrible price losses incurred earlier in the year.

Despite our four week rally, BDCS is still off (25%) for the year.

Hanging Our Hopes On

However, the total return Wells Fargo Scorecard Weighted Index is now only (6%) off the price at year-end 2019.

Should the rally march on even a little the Wells Fargo index might even break into positive territory by the time we’re singing “Auld Lang Syne”.

Dark Colored Spectacles

On the other hand, a more cynical observer might say that this month-long era of good feelings cannot last much longer.

That’s just the nature of rallies and of downswings.

Damaged

Furthermore, while many BDCs have performed better than anyone had the right to hope for back in March, it’s also undeniably true that many have been battered by the crisis.

More than half have reduced their distributions to shareholders.

Seven have Liquidity ratings – according to the BDC Reporter which tracks such things – that we deem POOR or only FAIR.

In terms of credit, we’ve just begun our BDC-by-BDC, company-by-company portfolio review but the BDC Performance Table shows that 27 of the 44 BDCs we evaluate have a POOR or FAIR rating.

Horses Mouths

Even many of the BDCs themselves – typically chipper even while they’re getting into the lifeboats – have been warning that difficult times still lie ahead.

Most of those admonitions came before the latest upsurge in Covid-19 cases which may – besides causing huge human suffering – slow down the economy and loan repayment prospects.

In the long run each BDC will have a very individual path to tread, but in the short term – as we’ve seen of late – the sector will move almost as one up or down.

Nothing Lasts Forever

Our guess for the rest of the year – and it’s no more than that – is that BDC prices will flatten out as some investors – despite FOMO – will take profits.

Still, we wouldn’t be surprised to see a positive total return on the year.

Coming Up

2021, though, is going to be a year where credit will reign supreme as the portfolio companies that bent but did not break in 2020 continue to be challenged.

This year companies, their lenders and sponsors have benefited from government intervention; rescue financing and emergency belt tightening.

Next year if fundamentals don’t improve for companies in a wide variety of sectors that you might or might not expect to be impacted by Covid, there are likely to be less levers to pull.

Early Warning

We’ll be looking at trends in BDC revolver draws going forward as a useful early indicator.

As you’ll remember, companies ran to draw on those revolvers – where available – at the beginning of the crisis  and much time was spent worrying about whether BDCs would be able to meet all calls.

They did.

Within a few weeks companies started repaying those revolvers; flush as they were from cash from other sources.

Currently most or all those revolvers have been repaid back to their pre-pandemic levels.

If we start to see yet another reversal of those fund flows- which will show up as early as the IVQ 2020 BDC results – we will begin to worry.

Deep Breath

Till then, BDC common stock should enjoy this last four weeks reversal of fortune.

At one point earlier in the year – with virtually every BDC price at an all-time low – the market was signalling an implosion like one we had never experienced before.

That includes the Great Recession, which was also a very frightening time for anyone holding BDC common stocks.

Now that the year is almost over, the BDC sector has come through without a Lehman-like moment and most players back to lending even though most of the professionals involved are still at home.

As we’ve said above, there may yet be punishment yet to come in 2021 and beyond, but the BDC sector has met and exceeded our expectations for this most unusual year.