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BDC Common Stocks Market Recap: Week Ended October 9, 2020

Posted on October 13, 2020

BDC COMMON STOCKS

Best Described

Balanced: That’s the best one word characterization we could find for describing BDC common stock prices this week.

Admittedly, the major indices – notably the S&P 500 – rushed ahead for a second week, making up for 5 prior weeks of red ink.

In the BDC sector, though, the tone was more measured.

The Wells Fargo index which we use to evaluate “total return” was essentially unchanged: down (0.03%) on the week.

Furthermore, the number of BDCs trading up or flat was 25 versus 21 that were down.

There were 5 individual BDCs that were up 3.0% or more, and an equal number (3.0%) or more down.

The number of BDCs trading over book remained the same at a still modest 8.

Headliners

Which is not to say that there wasn’t some excitement amongst some of the 46 denizens of the public BDC universe.

Saratoga Investment (SAR) – extensively covered by the BDC Reporter this week – released results that investors warmed to.

On the week, the stock price was up 11.2% according to Seeking Alpha.

However, enthusiasm was building in the days before the results came out because since the release till Friday’s close the increase in price was “only” 8.4%.

Stranger Things

Also on a high was Medley Capital (MCC).

As we have noted in the BDC Week In Review introduction this week, MCC announced late on Friday the sale of its joint venture loan portfolio to a Golub Capital affiliate.

(We don’t believe Golub Capital BDC – GBDC – was involved, but more on that when we analyze the subject further on Monday).

MCC was up 7.5% during the week, but 6.1% of that came on Friday.

Clearly good news travels fast. Even faster than it’s supposed to.

MCC is now trading at its highest level in the post-pandemic period.

Let Us Count The Ways

Investors are understandably excited that MCC receives $41mn in cash after the JV’s lender is repaid.

Admittedly, the BDC’s portfolio will shrink by a fifth (from $251mn at FMV to $204mn) but the cash balance – everything else equal – will increase to $92mn, or 78% from June 2020’s level.

At this stage, MCC has cash equal to 61% of its $151mn in (unsecured) debt outstanding.

MCV/MCX

No wonder its Baby Bonds jumped in price in after market trading.

Apparently early word of the transaction had reached certain common stock investors but not the debt market before the close.

That’s been remedied now.

Mysterious Ways

Finally, also up in price substantially was BlackRock Investment (BKCC): 6.8%.

Unlike the other 2 big movers there was no obvious news item that would justify investor enthusiasm.

Still, at $2.66 per share, BKCC remains firmly in the dumps and still paying its dividend almost completely with more shares rather than cash.

BKCC remains a speculative stock for everybody but those in the know.

Pointed Reference

Maybe the example of Investcorp Credit Management (ICMB) should serve as an example of what goes up can come quickly down.

Just a couple of weeks ago – after reporting results but before filing its 10-K – ICMB’s stock price shot up.

This week ICMB was the Biggest Loser: down nearly (15%).

Over the last month the stock is off (12%) and (55%) YTD, the seventh worst performer in 2020.

As mentioned in the BDC Week In Review, ICMB reported early in the week material amendments to its Term and Revolver with secured lender UBS.

Our first read of the 8-K involved caused us concern, but we first wrote to the BDC’s Investor Relations for a clarification in order not to say anything incorrect in haste.

Unfortunately, we have not heard back.

Not Good

Nonetheless, our reading of the disclosure suggests ICMB’s liquidity – already fragile – has only gotten worse as both debt facilities have been reduced.

This will squeeze whatever little in the way of cash resources the BDC has available.

Even before the UBS changes, the BDC Reporter has been concerned about the BDC.

Here’s what we wrote after reviewing ICMB’s conference call transcript on September 22, 2020:

“What has become abundantly clear, though, is that ICMB has severe challenges both where credit and liquidity are concerned. The BDC remains highly leveraged; has fully utilized its Term and Revolver and has very little cash in absolute terms, especially if unused commitments are netted out. Furthermore, a good portion of investment income coming in is in the form of PIK, which is not useful for paying the bills and may result in cash being depleted as costs and the dividends are paid out”.

Important Matters

Like OFS Capital (OFS), which we wrote about only after the week was over, ICMB’s Liquidity rating by the BDC Reporter is POOR.

If nothing else that should cause investors to look before they leap.

Judging by the 1 month price chart below that already appears to be happening after that initial flush of enthusiasm when ICMB’s price increased 40% (!) faded.

Looking Forward

We are now squarely in the fourth quarter of this miserable year and the odds of a late innings rally where BDC results are concerned seems unlikely.

BDCS – the UBS Exchange Traded Note which owns most BDC stocks – is off (30.0%) on the year and the “total return” Wells Fargo index is down (18.5%).

According to Seeking Alpha, only one of the 46 BDCs we track is in positive territory price-wise in 2020: Horizon Technology Finance (HRZN).

That means 45 are in the red.

Even the second best performing BDC stock (Oaktree Specialty Lending or OCSL) is off more than (10%) in price in 2020.

Jetliner View

Looking at the charts and the weekly numbers we collect from a 36,000 feet perspective, we can divide 2020 YTD into 4 distinct phases.

Between January 1 and February 20 of this year, BDC prices were stable, trading at their highest level in two years.

In fact, BDCS reached its apex right at the end of Phase One at a high price of $20.55

Then the pandemic hit and the worst of the impact lasted through March 23, which is Phase Two.

Panicky investors – not unreasonably for the most part – caused a huge drop in BDCS to a lowest low of $8.50 a share.

That was a gut wrenching (59%) drop.

Of course that’s a blended percentage drop. Some individual BDCs dropped in even greater percentage terms.

As always in these situations, the markets realized they had overshot during their time of panic.

In Phase Three a rally followed that lasted – arguably – till May 29 or June 8 (the highest point reached in the post-pandemic period).

We prefer May 29 because the June 8 high point was quickly followed by a drop back by June 11 to that late May price.

Using May 29 as the end-point of Phase Three – and a price of $13.98 – indicates that sector rallied (64%) but was still off (32%) from the February 20 level.

GPS

All of this recap is to explain that BDC common stock prices remain locked in Phase Four: May 30 till today: 18 weeks later.

The chart below shows how BDCS has fluctuated up and down in a relatively narrow band but remains very close to the level set in the late spring.

$64,000 Question Unanswered

Of course, we have no definitive idea how long the BDC sector continues plodding along in a relatively straight line.

We can admit that we were caught out by the head fake between September 14 and September 24 when BDCS dropped (5.7%) – along with the major indices – which caused us to move partly to the sidelines as an investor.

Twenty years after buying our first BDC common stock we continue to be humbled by the market.

Are We There Yet ?

In any case, the question at this stage in 2020 is whether there will be a Phase 5 or more of the same ?

If the latter is the case, the “total return” from BDC investing in 2020 might improve slightly to a lower loss than the current (18.5%) but won’t change materially on a price basis, which is (30%) as shown above.

A Little Price Analysis

Putting that into historical context using BDCS data which stretches back to early 2011, 2020 threatens to be the worst year for BDC prices over that 9 year period.

The current record is held by 2015 when BDCS dropped (17%), so there’s no contest that 2020 is very likely to be crowned Worst Year Ever.

[However, as long term BDC investors will remember 2014 and 2015 combined saw BDC prices drop (32%) ].

Can’t Help Guessing

Our guess at this point is that there will not be another “twofer” of red ink for the BDC sector, and 2021 will result in either flat prices or a rally over the current level.

In terms of short term price movements, the BDC sector is likely to be swayed by the protean nature of investor confidence.

Longer term, though, BDC price levels are determined by the nature and outlook for earnings and dividends and we expect those to stabilize or increase in the year ahead.

Some of that the market has already factored in but as the quarters roll by and confidence grows we expect the multiples investors are willing to pay for those future income streams will increase.

This year, though, seems like a lost cause.

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