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BDC Common Stocks Market Recap: Week Ended September 10, 2021

Posted on September 14, 2021
 
BDCs: Multiple

PREAMBLE: APOLOGY

We want to apologize for the delay in publishing the Common Stocks Market Recap. We like to be a fixture on our readers Sunday afternoon. However, “due to matters outside of our control”, we were foiled this week. Starting on Saturday, we could not access our website and despite frantic phone calls to our site manager the problem could not be resolved till Monday.  The fault was highly technical and outside our understanding of such things. Adding to the BDC Reporter’s woes, we happen to be travelling, which has delayed publication further. We did, though, prepare the weekly recap you’ll see below on Saturday morning, which we’re finally able to publish. The good news for avid BDC watchers is that very little is happening to either prices or in terms of news. Still, we like to be comprehensive and timely and apologize again for the delay. 


BDC COMMON STOCKS

Week Thirty Six

Falling Back 

The major indices have been in retreat in recent days, albeit from record high levels.

This has meant – as one might have expected – that the BDC sector has pulled back as well in this four day week.

However, while the S&P 500 fell (1.70%), the BDC sector – as measured by BDCZ, the UBS Exchange Traded Note which owns most of the sector stocks – went down only (1.0%).

Likewise, the only BDC ETF – whose ticker is BIZD – also dropped (1.0%).

Still, there were many more BDCs in the red (31) than in the black (10).

Volatility was relatively modest, with very few major price movements at individual BDCs.

For the period, no BDC increased 3.0% or more in price – one of our favorite metrics.

Only three BDCs decreased by (3.0%) or more.

Last time we had a negative week there were 14 in this category.

The BDCs involved this week were Golub Capital (GBDC) – off (3.5%); and Gladstone Capital (GLAD) and Gladstone Investment (GAIN)  –both off (3.2%).

There was no material news emanating from any of these three this week and all remain priced within 10% of their 52 week highs.

Overall, though, the number of BDCs trading within 5% of their highest price did come down this week from last week: from 23 to 15.

Likewise, the number of BDCs trading at or above book slipped as well, from 20 to 18.

 

Questioning 

What to make of all this ?

Are BDC sector prices showing signs of fatigue and will we be seeing a further downward drift ?

As always reading the tea leaves is very hard.

However, we were encouraged this week by the fact that 5 individual BDCs reached new 52 week highs, despite an outgoing tide.

At these new heights a very long way into this rally were Fidus Investment (FDUS); FS KKR Capital (FSK); Oaktree Specialty Lending (OCSL); Saratoga Investment (SAR) and SLR Investment (SLRC).

Most of these BDCs have been performing very well and most have been increasing their distributions and all have reported higher NAV Per Share.

This suggests investors are still willing to pay up for good performers.

If the broader markets – currently a little exhausted and wary – get a second wind, we should see the BDC sector step up as well.

At this point, BDCZ has to move up only 3.5% to return to the 52 week high level reached in June.

(To compare and contrast, the S&P 500 only has to move up 1.1% to reach its 52 week high, the NASDAQ 1.9% and the Russell 2000 6.0%).

The BDC Reporter remains optimistic that the likeliest outcome in the months ahead will be another price move upward.

 

Very Quiet 

In terms of news, there was very little to report during the week.

Everything that did occur – a number of dividend announcements and press releases about new transactions at Capital Southwest (CSWC) and Main Street (MAIN), we’ve already covered in our Daily Updates.

On the credit front, we reported what seems like good news for Monroe Capital (MRCC) and potentially bad news for FS KKR Capital (FSK) and Apollo Investment (AINV) due to the Sequential Brands bankruptcy.

Overall, though, credit conditions – already very good – look like they’re only going to get better.

Here is a long but instructive extract from a Fitch Ratings press release on September 9 about the current and future credit status of both leveraged loans and high yield bonds:

Low US institutional leveraged loan (LL) and high-yield (HY) bond default rates will continue in 2022, says Fitch Ratings. Uncertainty related to the pandemic remains due to the potential impact of coronavirus variants. Nevertheless, a sustained decline in totals in our Market Concern Loans and Bonds, and low near-term maturity walls have resulted in a reduced YE 2022 LL and HY default rate forecast of 1.5% and 1%, respectively, compared with a range of 2.5%-3.5% for both LL and HY previously.

We expect the recovery from pandemic-related disruptions for speculative-grade issuers to continue into 2022 due to capital market access and improving operating conditions. The LL default rate is likely to be slightly higher than HY in 2022 because a higher percentage of LL issuers are rated ‘B-‘ or lower and the Top Market Concern Loans total is double the size of the Top Market Concern Bonds.

Our lowered 2022 projections are in line with our forecasts of 1.5% for LL and 1% for HY for 2021. However, 2021 rates could very well challenge 2011’s low of 0.6% for LL and 2007’s low of 0.5% for HY, given the YTD default rate for both segments stands at 0.4%.

LL default rates for leisure and entertainment, and utilities, power and gas could well exceed our 1.5% forecast for 2022. Leisure and entertainment could reach 10% if Cineworld files for bankruptcy protection. The utilities, power and gas sector could also approach double-digit levels, as several issuers reside on our Tier 2 Market Concern Loans list. The energy and retail default rates, which drove LL default activity over the past few years, are expected to be only 3% each, well below the 19.6% and 16.7% levels, respectively, for 2020.

HY 2022 default rates for most sectors are expected to finish the year below our 1% forecast… “

 

Glass Half Full

This sort of projection supports our optimism that BDC fundamentals should continue to remain strong for several quarters to come.

Whether that will be enough to push prices to a new record remains to be seen.

On the other hand – and we know we’re playing with fire by saying this – the ingredients do not seem to exist for a significant price correction either.

BDC investors will probably be delighted if the market just remains – more or less –  at its current level as yields remain high, and the prospect of higher payouts in many cases is in the air.

Even if BDCZ remains unchanged at the $19.60 level of Friday for the rest of the year, BDC investors will have had a wonderful year.

 


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