BDC Common Stocks Market Recap: Week Ended September 25, 2020

Curious

The week ended September 25, 2020 was a strange one.

BDC price volatility jumped very suddenly, as did the correlation with the major indices,  after weeks of indifference to one another.

When we left you last, the BDC sector – as measured by BDCS – was at $14.33.

By Wednesday mid-morning, though, all the hand wringing about a second Covid-wave; an unresolved stimulus; etc. seems to have overcome BDC investors.

Ditto for all the major markets – including high yield and leveraged loans – who began to buzz in unison.

By Thursday BDCS was down to $13.63.

That’s a drop of (4.9%) in what seemed like the twinkle of an eye.

From the recent high of $14.47, set on September 14, BDCS was down (5.8%).

Not Alone

The S&P 500 was also suffering: in the red for a fourth week in a row.

Since peaking on September 2, that famous index was down enough that the term “correction” was being dusted off by the financial journalists.

Then, on Friday investors had second thoughts, pushing BDCS, and the rest of the stock market indices, back up.

Finally

For the week, the BDC sector was down (2.4%).

That’s the worst weekly result in six weeks, and the second worst in twelve weeks.

The BDC sector has now dropped back to the level of early August.

Supporting

In terms of the other metrics we look at weekly:

Only 9 individual BDCs increased or were flat in price terms in the week, while 37 were down.

One And Only

Only 1 BDC went up 3.0% or more.

For no particular reason, as there has been no material development we could find, Garrison Capital (GARS) moved up 3.5%.

More notably, 18 different BDCs (about one in two that were in the red) dropped (3.0%) or more, the highest number in 6 weeks.

Breaking Bad

Most punished was Investcorp Credit Management BDC (ICMB), off (13.4%), which was also aggravated by its $0.18 dividend being paid.

Regular readers will remember that ICMB was in the exactly opposite position last week: way up.

Either investors have taken the time to read the BDC’s finally published 10-K, which we discussed as part of annotating its conference call transcript, and begun to worry or are taking profits.

What ICMB does this coming week price-wise will tell much.

Similar

Also down by a double digit percentage this week  was OFS Capital (OFS), down by (10.1%).

Like ICMB,  OFS was briefly an investor darling, moving up 22% (!) in price in early August.

The bloom is off that rose as well, with OFS down (13%) since its high.

Theme

We could keep on running down the list of BDCs in the red, but it’s clear that investors were just taking money off the table left, right and center.

The smaller BDCs dropped the most in price in percentage terms as you might expect but there were plenty of behemoths in the red this week.

At times like this we often have a look at what Ares Capital (ARCC) – as the market leader – is doing price-wise.

Despite raising very inexpensive unsecured debt capital this week – proving the BDC remains an institutional investor favorite – its stock dropped (0.8%).

Obviously that’s not very much but take a step or two back and you’ll see ARCC has fallen (15%) since its post-Covid high in early June.

Thar’s slightly worse than BDCS in this period.

Points To

Taken together, this all points to a worrisome trend developing of lower prices across the board.

Three quarters of the public BDC universe are currently trading at prices below their 50 Day Moving Average.

You don’t have to be too much of a pessimist to envisage a scenario where concerns about [FILL IN THE BOX] cause prices to drop further.

Just a (1%) downward move and BDCS will be in “Correction” territory versus the June 8 high level.

Detached

As we’ve said before, this will have little to do with the BDC sector’s own fundamentals.

There won’t be much in terms of results – except for Saratoga Investment (SAR) which is always one month ahead of the herd – till late October.

By the time IIIQ 2020 BDC earnings season rolls round, much can happen in the greater world, and the “most important election in your lifetime” will be only a fortnight away.

Will the markets soldier on, climbing their proverbial walls of worry or will there be a strategic withdrawal until the next four years come into clearer view ?

Not that anyone is asking us – and no one should – but we’re leading towards the latter scenario.

Long Way To Go

If we’re right, the chances of the BDC sector making up this year’s high losses becomes insurmountable.

Just to set our GPS with 3 month to go in the year, the Wells Fargo BDC Scorecard Weighted Index is off (21.4%) on a total return basis.

BDCS is down by (31%) as far as BDC prices are concerned.

Either Way

If these were “normal” times and a “normal” recovery, we’d expect BDC prices to have nowhere to go but up from here, but that’s not the case.

A further step down – like the one we had earlier in the week – seems more likely than the short, sharp revival that Friday brought.

The next few weeks will be even more interesting than usual.