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BDC Fixed Income Market Recap: Week Ended July 2, 2020

Posted on July 6, 2020
BDCs: Multiple

BDC FIXED INCOME

Slight

Like BDC common stocks, the S&P 500, the Dow Jones and the NASDAQ, the BDC Fixed Income sector moved up in the four day business week to July 2, 2020.

This week, the median of the 42 BDC issues we track increased by 0.4%, up from 0.8% the week before.

The median price was $23.92, or 95.7% of par.

This was a new record high for the median price since the Covid-19 crisis and yet another climb back towards $25.00 par.

However, there was no great enthusiasms amongst investors in this unusual period preceding the holiday.

Eternal Two

As in the week before, only two issues traded at or above par.

These are the same debt issues of Ares Capital (ARCC) and of Hercules Capital (HTGC) with the respective tickers of AFC and HCXY that have been atop the leaderboard for months.

That’s still a very meager number trading at or above par: one quarter or less of the number that were in this category before Covid-19.

Underbelly

Down at the bottom of the table, there were 10 BDC issues trading below $22.50, either in Correction or Distressed territory.

That’s in line with what we’ve been experiencing for several weeks now.

Clearly investors have not made up their minds as to whether or not to be worried about the seven different BDCs involved.

Contrast

Curiously, one of those BDCs is Great Elm (GECC), all three of whose Baby Bonds are in this “danger zone”.

In fact,  two of the three – GECCM and GECCN – are the lowest priced debt issues this week at $19.44 and $18.90 respectively.

Yet, the BDC’s common stock over the past 4 weeks has shown the greatest increase in price as shareholders confidence appears to grow.

According to Seeking Alpha, GECC’s stock price  is up 16.9% over 4 weeks and trades at a modest – by the standards of the day – (16%) discount to book.

Yet the BDC’s debt investors – judging by the price of all its Baby Bonds – expect not to be repaid anywhere near to full value.

One side or another is mispricing GECC’s securities.

Who that is will be much clearer – but not definitively resolved most likely – when the BDC’s IIQ 2020 results are published.

No date has yet been set.

Coming Attractions

In the very short term BDC Fixed Income investors will be learning about Saratoga Investment (SAR) whose May 2020 results come out towards next week’s end.

The BDC has two Baby Bonds outstanding: SAF, which closed at $23.81 and the newly minted SAC, for which we do not still have a price.

SAR’s stock is trading at $15.30, or only 56% of book value.

Some of that big discount, though, is due to the fact that SAR’s  book value is calculated as of February 28, 2020- before any meaningful impact from Covid-19.

We’re likely to see a substantial drop in book value per share when the May results are known.

Both debt and common stock investors, though, will be looking at the BDC’s results in their totality to determine its longer term prospects.

We expect to have more to say at week’s end after we review SAR’s earnings release, 10-Q and Investor Presentation.

Quiet Week

Otherwise, there was no material BDC Fixed Income news in the week, which is not surprising.

Not So Quiet

However, we expect over the next 6 weeks – as most of the IIQ BDC results to trickle in to get a much clearer idea of what’s happening across the BDC sector.

That may well mean some drastic re-valuations of BDC Fixed Income prices just when this segment was settling down and quietly approaching normal.


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