BDC Common Stocks Market Recap: Week Ended September 17, 2021Posted on September 22, 2021
BDC COMMON STOCKS
Flying High ?
If we step back and look at the numbers and the charts, all the major indices – and the BDC sector – continue to fly high.
After all, the S&P 500 is just (2.5%) off its 52 week high and all time high; the Dow Jones is (3.0%) off and the NASDAQ (2.3%).
YTD, the S&P has gone up 18%, the Dow 13% and NASDAQ 17%.
The BDC sector, too, continues to perform very well using YTD numbers: just (3.9%) off the mid June 52 week high and up 20.1% since December 31, 2019.
The Wilshire BDC Index – using the “total return” calculation – is up 31.6%, as the screenshot below shows:
Investors should be delighted.
However, there is also a definite weakening currently going on across the markets as well, which is causing concern for some.
All 3 major indices are down MTD, and there’s more than the usual talk of corrections, crashes and reversions to the mean.
Certainly, the BDC sector has not been able to avoid this rising damp.
For a second week in a row BDCZ – the UBS Exchange Traded Note which owns most BDC stocks and which we use to measure sector price trends – was down.
BDCZ was off (0.5%), following a (1.0%) drop the week before.
Although we’ve had as many up days as down days – we counted – BDCZ is down (0.5%) in price half way through September.
More Red Than Black
This week 26 individual BDCs were down in price, well outstripping the 15 that were up or flat.
A little disturbing, at first approach, is that over the 5 day period, 14 BDCs dropped (3.0%) or more.
However, with so many BDCs paying out third quarter distributions maybe this is to be expected.
Here are the BDCs involved, as shown on Seeking Alpha’s excellent data tables:
We also look at – but rarely discuss – momentum data such as the current price against the 50 day and 200 day moving average.
A month ago, 32 BDCs were trading above their 50 day moving average. This week the number has fallen to 12.
Even the 200 day moving average – which some investors favor – has dropped from 41 in the black to 35.
A favorite metric of most everybody: the number of BDCs trading above book value has fallen sharply from a recent high of 20 (22 in mid June at the height of the heights) to 15 this week.
Which is all to demonstrate that in a very good year for BDCs – the best we’ve known in a decade or more – there has been weakening going on in September, and even before.
Are these the first cracks in the dam before a major collapse or just modest fluctuations with no lasting import ?
We continue to believe it’s the latter as fundamental trends for the BDC sector continue to be positive, with no clear cut end in sight.
All For The Good
This week – as discussed in the Daily Market Update – the ongoing reduction in the BDCs cost of borrowing continued with Hercules Capital’s (HTGC) latest unsecured $325mn debt raise.
Another positive BDC theme – dividend increases – was featured when Stellus Capital (SCM) announced a higher “regular” dividend distribution for the final quarter of 2021.
(The BDC Reporter’s latest assessment is that a quarter of BDCs should continue to increase their dividend payouts in 2022 over the 2021 level, and an as yet undetermined large number should be able to reduce their cost of capital further).
We’re also hearing from multiple sources – including the flood of daily posts from Direct Lending Deals – that new deal activity in leveraged financing continues – the lifeblood of the BDC sector.
In this vein, Pitchbook has just undertaken a review of IIQ 2021 deal activity and had this to say about both the rough and the smooth:
“The US PE middle market kept roaring along in Q2, posting a third straight record-breaking quarter for dealmaking activity.
GDP growth, the impending capital gains tax hike, and an ample supply of debt from direct lenders continued to drive a risk-on environment for capital deployment.
Many investment banks’ pipelines are now full through the end of the year.
The breakneck pace of capital deployment has also compressed the fundraising cycle. Firms are rapidly returning to market with new funds.
To be sure, we’re also watching some storm clouds on the horizon.
One is the Delta variant of the coronavirus, which has slowed economic recovery, especially for smaller businesses. As a result, we’re seeing fewer small companies exit to strategics than we’d otherwise expect.
Another is intense labor shortages in industries from manufacturing to hospitality to healthcare.
This is driving consolidation and creating deal opportunities for companies that can improve hiring and retention or automate low-skilled jobs.
Finally, although the outlook for emerging managers has improved relative to 2020, fundraising competition remains fierce for many smaller and younger firms, as LPs look to simplify their commitments and the largest firms launch more middle-market products.
Despite these challenges, we expect runaway dealmaking to continue—even accelerate—through the end of 2021″
Of course, credit conditions also continue to be favorable.
We’ve just completed a deep dive into Monroe Capital’s (MRCC) non performing portfolio companies and been pleasantly surprised about how many troubled companies have positive outlooks.
(The Credit Review is 99% complete and we’ll be publishing the article shortly).
This fits with the general tenor of what we’ve seen when reviewing credit across the BDC space while updating the BDC Credit Table.
Taken For Granted ?
If we get in the third quarter another round of BDC dividend increases; an almost universal step up in NAV Per Share and still declining credit problems, will that result in a boost to the sector’s price level or has the market already assumed as much ?
As always, we don’t know, but we continue to lean – this month’s price softness notwithstanding – towards the likelihood of another BDC price surge – and a new 52 week high – before 2021 is done with us.
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