BDC Common Stocks Market Recap: Week Ended October 2, 2020

Riveting

This week we saw the economy continue to show signs of distress; leveraged loan prices in the secondary market double back after months of recovery and hints of a constitutional crisis ahead.

Nonetheless,  both the major indices and the BDC sector did not flinch – despite a couple of stutters along the way.

Here is the 5 day chart for the Wells Fargo BDC Scorecard Weighted Index – which we’ve taken to use of late as our measuring stick – which illustrates our point:

Reaching Higher

On the week, the BDC index was up 3.7% and the S&P 500 increased by 1.5%, made the more notable by following 4 consecutive weeks in the red.

Of the 46 public BDCs we track, 37 were up in price – the very inverse of the week before when an equal number were down.

Indeed, there was a ferocity to some of the individual BDC price increases, with 28 rising by 3% or more over the 5 days involved.

That’s the highest such number since mid-June – a whole quarter away.

Number One

The biggest mover was Oxford Square Capital (OXSQ), which moved up 10.8%.

Shareholders may not be cheering too loudly because it’s been a lousy year to own the stock of this BDC with a large exposure to the CLO market.

Even with this upward move, OXSQ is the sixth worst performer in 2020 where price change is concerned, down (53%).

We’re calling out the number from the BDC Data Table, a metric that we look at regularly to judge how the markets are treating BDCs 9 months into a difficult year.

FYI

If you’re wondering, the worst performers from a price standpoint this year are – tied at (61%) down – Great Elm Corporation (GECC) and First Eagle Alternative Capital (FCRD).

These are two very different BDCs but both have had to cope with multiple – and still continuing – credit problems and have had to find ways to right their ships.

The Rights Way

As we know from the BDC Reporter and the BDC Week In Review, GECC has chosen to raise new equity from a Rights Offering to give itself a new lease on life.

Now that the $32mn of new capital has been raised, the manager has the opportunity to launch into its promised strategy of investing in financial services companies.

However, that amount of new capital only goes so far, so if GECC is to improve itself in the long term – currently three-quarters of its capital raised over its history has resulted in a loss – more monies will be needed.

That probably means trading out of some existing loan and bond positions and reinvesting the proceeds in this new strategy.

Long Way To Go

Of course, it’s way too early to tell if GECC 2.0 (or is it 3.0 when you you include Full Circle Capital ?) will be successful or even just what management has in mind.

Inquiring minds will be interested to see what fresh investments turn up in the portfolio from the IVQ 2020 on.

However, we expect that the remaking of GECC’s strategy and investment portfolio will require many quarters to take shape.

Wobbly

While that’s happening GECC will be hoping that the existing investment portfolio, filled with trouble spots, does not wipe out (or worse) the capital just raised.

As GECC shareholders will know, much will depend on what happens to Avanti Communications.

As of June 2020, GECC reported that the satellite company was not impacted by Covid-19 and continues its herculean task to become a successful operator.

GECC’s FMV in Avanti is $28.4mn.

Just Don’t Know

Here is a link to a recent interview with the company’s CEO, which might be of interest to GECC and BlackRock TCP Capital (TCPC) shareholders – both of whom have positions in all layers of Avanti’s balance sheet.

For our part, we can’t tell – after years of reading, writing and doing the arithmetic on Avanti’s huge debt load – whether this will be the greatest turnaround we’ve ever seen or a credit implosion.

To its credit – Avanti – is a survivor, having lasted longer than we might have expected over 4 years ago when we skeptically wrote about the company’s likely fate.

Return

Getting back to BDC sector price trends…

This mini-surge has greatly increased the number of BDCs ahead in price over a 1 month period and versus their 50 Day Moving Average.

There are now 20 in the former category, just short of a majority.

In regards to the latter there are 30, or two-thirds of our chosen universe.

No Trend

Nonetheless – and a humbling reminder that all this huffing and puffing back and forth (in the last 8 weeks we’ve had an equal number of up and down periods)  – the number of players trading above book value remains at 8.

That’s the same number as 6 weeks ago…

For the year to date – and with now just 3 months to go in the year give or take a day or two – the Wells Fargo BDC index is off (18.4%).

[ By the way – as a fun fact – the number of BDCs trading above book was 19 at year end 2019, but dropped to zero during the depth of the pandemic and has now made its way almost half way back].

Ahead

The next few days – let alone the rest of the year – are going to be very challenging due to the possibility that the stock and credit markets may react to the President’s ill health and to the growing Covid-19 numbers nationwide and globally.

Or not.

As we saw this week, investors have become very adept at climbing the infamous “walls of worry”.

Coming Attractions

BDC investors have an early third quarter BDC reporting this coming week: Saratoga Investment (SAR).

What SAR will tell us cannot be applied across the whole BDC landscape, but will still be informative for its own shareholders and BDC investors generally.