BDC Common Stocks Market Recap: Week Ended October 16, 2020

The former was down (1.88%) and the latter by (2.38%).

That’s the second week of red ink in a row but the Wells Fargo index was only off by (0.03%) the week before.

Outnumbered

The number of BDCs up in price (10) were vastly overshadowed by those down (36).

Furthermore, there were just three individual stocks that increased by 3.0% or more but ten that went down by (3.0%) plus.

Even the number of BDCs trading above book took a little step back: from eight to seven.

This in a week where we can hardly point to the influence of the broader markets, as the S&P 500 moved up an un-dramatic 0.19%.

Unfazed

Frankly, though, the BDC Reporter does not make much of this very recent decline.

After all, most every BDC has announced its third quarter earnings release and attendant conference call timetable.

Useful

[By the way, we are feverishly updating the BDC Earnings Calendar in the Subscriber Tools section for those seeking a useful reminder of those release dates and the link to the CC.

Market Timing

It’s not unusual for BDC stock prices to pull back in advance of earnings season as some investors take a few chips off the table just in case the coming news proves bad.

The blessing – and the curse – of BDC investing is that the bulk of market moving information pops up just 4 times a year.

The rest of the time investors are left to guess and make mountains out of minor news molehills.

Recurring Theme

As we’ve discussed previously, BDC sector prices remain in that relatively narrow range that began May 27.

Even the release of IIQ 2020 results in the summer did not seem to shock or surprise BDC investors and prices continued as before.

We are now almost five months into this quiet period and it’s not clear – at least to us – what might break BDC prices loose, either upward or downward.

Blessings Counted

In some ways it’s the best of times to be a BDC investor as coupons can be clipped without loss on the price side.

The Wells Fargo index – which provides that “total return” calculation – is up 3.3% in this period, essentially all from dividend income.

Ups

With that said, let’s look at some of the week’s individual BDC price move highlights:

Saratoga Investment (SAR) recorded the biggest percentage increase (6.93%) after a notable increase last week as well,  following the publication of its results.

Over the 1 month, 6 month time and YTD horizons Seeking Alpha calculates for every BDC, SAR is 1st, 4th and 6th.

That’s an excellent price performance for a BDC that not so long ago seemed to anticipate the worst- and cut its dividend to nil.

Cause & Effect

Of course, investors were also impressed that the most recently announced underperforming assets were very modest (6.2% of the total as the BDC Data Table shows) and the dividend is on the increase.

We’d guess that if other BDCs can pull off similar feats  in the weeks ahead – low credit risk, higher payouts – we might see similar large price jumps, but every stock is different.

Feline Analogy Spoiler

The second biggest mover  upward on the week was Investcorp Credit Management (ICMB), up  3.68%.

That’s something of a “dead cat” bouncing as ICMB is off nearly (20%) in the past month, the worst performing BDC in the period.

Unresolved

Unlike SAR, ICMB’s latest published results were not trouble-free and questions about the BDC’s liquidity linger.

Down in the nether regions of the BDC price table where stocks trade below $5.0 a share and volume is low, price volatility is high.

A 3.68% increase does not suggest a change of heart by investors.

Tech Darling

Third highest price change, and worth mentioning because the BDC involved is far and away the price winner of 2020 so far is Horizon Technology Finance (HRZN).

This week HRZN was up 3.1%, and is up 9.1% over 30 days.

More importantly – if SA is to be believed – the venture-debt BDC is the only player to be in the green price-wise in 2020: 3.3%.

Even number two – Oaktree Specialty Lending (OCSL) which recently raised its dividend while HRZN’s only remained unchanged – still trades (11%) off for the year.

Ironically enough in an annus horribilis for everyone else HRZN is trading at or close to 5 year price peaks.

Dividends Dominate

In terms of BDC news, there was little of note this week.

Three BDCs reported quarterly distributions: Gladstone Investment (GAIN); Gladstone Capital (GLAD) and Portman Ridge Financial (PTMN).

However, all were unchanged and as expected.

Doubt

The BDC Reporter does have questions about the sustainability of GAIN’s 7 cents a share monthly payment, which we discussed in an article.

What happens to Portman Ridge Financial’s (PTMN) distribution once the merger with Garrison Capital (GARS) happens is also unclear.

Management deliberately rushed through this latest – and last – payment as a separate entity with that combination in mind as mentioned in the press release:

“This otherwise regularly scheduled distribution is being declared early for the third quarter of fiscal 2020 in anticipation of the closing of the previously announced merger with Garrison Capital Inc. Portman Ridge expects that it will resume its regular schedule of quarterly distributions in February 2021“.

Behind The Curtain

However, in the background much is happening in BDC credit.

We’ve been seeking to keep readers up to date with any major developments at public BDC portfolio companies.

We wrote about a credit setback at an energy company financed by Sixth Street Specialty Lending (TSLX),  which has lived a mostly charmed life in this regard till now.

There was happier news where a Harvest Capital (HCAP) portfolio company was concerned, which was sold out of bankruptcy and will result in some recovery for the BDC.

Also, at the BDC Credit Reporter is an article about GK Holdings, which is held by Goldman Sachs BDC (GSBD) and HCAP again, which also had good news to report.

The sale of the business as part of a SPAC transaction – the latest Wall Street craze in a market with plenty of spending money – seems likely to result in a repayment at par where significant losses were previously anticipated.

Stranger Things

Generally speaking the apparent trend across the BDC-financed credit space is for more good news than bad.

We’ve only recorded 3 bankruptcies since September 11.

Two of those were in the perpetually moribund energy sector and the third was pharmaceutical company Mallinckrodt, whose troubles are very “idiosyncratic”.

The amounts involved are not particularly high – $45mn at cost – and only half of that involves two public BDCs.

Change

The bloodbath of credit losses we once expected –  but have been talking down for weeks now – does not appear to be happening, or even to be on the horizon.

Over the weekend we’re going to review the BDC Credit Reporter’s Weakest Links – i.e. companies expected to default shortly – which has already shrunk to modest proportions.

We currently count 16 companies teetering on the edge of non performance out of the thousands we track that BDCs have financed.

Most interesting of all, though, will be to see how things stand in early November when all the BDCs have reported about the credit standing of their portfolios.

Stay tuned for a full update in a month.