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BDC Market Recap: Week Ended February 24, 2017

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Week 8 of 2017 is also Week 54 of the BDC Sector rally.

Using the UBS Exchange Traded Note BDCS as our measuring stick as we do every week, the sector closed at $23.70.

That’s up from $23.49 the week before, and another new high.

STICKING TOGETHER

In an almost complete replica of last week and many prior prior weeks, 35 of the 45 BDCS we track were trading above their 50 Day Moving Average.

An even higher number (39) were trading above the easier to beat 200 Day Moving Average.

Like last week, 39 are trading within 10% of their 52 Week Highs.

NAMING NAMES

In Week 8, American Capital Senior Floating (ACSF), which is shortly likely to get a new name, reached a new 52 Week High.

So did Solar Senior Capital (SUNS).

More interesting is that perennial under-performer Apollo Investment (AINV) was not far off a 52 week high too, trading just below NAV and at over 10x its distribution.

BOTTOM OF THE BARREL

Like last week, there were only 2 BDCs hurting from a 52 Week price standpoint, within 10% of their lows:

Great Elm Corporation (GECC) and Fifth Street Finance (FSC).

However, the former is a recent new addition to the BDC list and is only 5.7% off the 52 Week High as well.

As a result, the only BDC being harshly punished by the market is FSC: 1% off its 52 Week Low and 28% behind the corresponding high.

Of course, FSC did cut its distribution yet again a few weeks ago, and announced a doubling of non-accrual loans.

PERSPECTIVE

Pulling back further from the data, we see that 20% of BDCs (9)  are trading more than 10% off their 52 Week Highs.

Every name involved has under-performed in the past twelve months and most every one has cut its distribution.

Still, there are several other similar BDCs who have crept up the league tables as investors seek turn around candidates to back.

PUZZLEMENT

The BDC Reporter has been counting under-performing investments at every single BDC for months now.

Earnings season is only half way done , and so the latest updates on each investment portfolio remains incomplete.

However, using IIIQ 2016 data and what we have of IVQ 2016, suggests that more than half of the BDCs we track have problems in their portfolios.

Some very high flying names from a price standpoint also have 20%, 30% or even more of their investments on our Watch List.

More anecdotally, most of the BDCs who self evaluate their overall portfolio quality are reporting weakening trends.

Where a year ago the market punished BDCs on every piece of bad news those portfolio problems are barely reflected in most BDC stock prices in 2017.

That’s what a sector rally looks like, playing out every day on our screens and weekly in this column.

Market Performance of BDC Baby Bonds + Preferreds

 

SMALLER BUT STRONGER

This week we removed two BDC Baby Bond issues from the 37 that we track.

Both a Hercules Capital and a Medley Capital Baby Bond have been redeemed, so we’re down to 35.

The median price was $25.64 versus $25.57 . That’s not strictly comparable with prior periods because of the excisions.

Nonetheless, all the perspectives we use to evaluate the BDC Baby Bond market suggests a still robust demand.

COUNTING THE WAYS

Two-thirds of issues are trading above their 50 Day and 200 Day Moving  Averages.

More remarkably, of the 10 long term Baby Bonds we track, 80% are trading above their 50/200 Day Moving Averages.

Those are bonds which don’t mature till 2023 at the earliest and 2042 at the latest !

Where BDC common stocks have a small proportion of sad sack names, only 1 Baby Bond issue is trading below par (and regular readers know who that is).

SURPRISE ! SURPRISE !

In a way, the performance of Baby Bonds is more surprising than what’s happening in common stocks.

After all, all the main stock markets are on high heat, hitting records not seen in decades.

It’s not surprising that BDC common stocks should be joining the market, especially as credit risks are seen as low.

(Notwithstanding the BDC Reporter’s Watch List !).

PARTY IN JUNK

However, commentators have been sounding the death knell for fixed income securities ever since medium and long term Treasury rates began to rise late last year.

Nobody seems to have told investors in the biggest High Yield Bond Exchange Traded Fund with the ticker HYG, which has just gone up in price as interest rates have risen.

Commentators-and some investors-have forgotten that the value of a fixed income security is as much dependent on confidence about repayment in the future as the direction of longer term interest rates.

Not to mention-as most commentators rarely do-the availability or otherwise of other venues to park capital.

That’s becoming harder and harder to find as the stock markets hit new records.

We expect investors in Baby Bonds are more confident than ever before BECAUSE the related common stock prices are rising and there are fewer alternatives for similar risk out there.

NOTHING LASTS FOREVER

Both the bonanza in BDC common stocks and the strength in Baby Bonds cannot last forever.

Confidence is high now, but for those of us who’ve been invested in this sector since 1999 (first trade: the recently departed American Capital) know that can and will change.

STORY TIME

When will that be ? We don’t know but we’ll tell a little story:

Back in early 2011, optimism about the future direction of the U.S. economy was rising.

Short term interest rates were projected to jump up, and several BDCs went public based on the assumption that higher floating rates would be a boon.

(A couple of new BDCs even included their strategy in their name).

BDC credit and earnings performance were on the upswing as most of the existing players had cleared out the under-performing credits left over from the Great Recession.

The folk at UBS decided this would be an auspicious time to launch a BDC sector Exchange Traded Note (similar to an ETF) and launched in April 2011.

That’s how BDCS was born.

SUMMER ANGST

Then in the summer of 2011 the markets started to worry about the implosion of Europe, starting with Greece and spreading out from there.

This has nothing to do directly with the BDC sector whose exposure to anything but the USA is negligible.

Yet, in a matter of a few weeks the newly minted BDCS dropped by 25% in value.

We were not formally tracking the data at the time but you can be sure every BDC out there was trading below its 50 and 200 Day Moving Average as temperatures rose in Europe both literally and figuratively.

BDCS is an weighted average of most BDC companies so some individual BDC stock prices dropped by 30% or more in a few months.

Of course, the world survived, but short term rates did not rise for another 5 years and the BDCS stock price did not return to its April 2011 launch price till September 2012.

P.S. : PUTTING IN A GOOD WORD FOR BOND(S)

At the time in 2011 there was only one publicly tradeable BDC Baby Bond: a long term issue by Allied Capital that had been acquired by Ares Capital with the ticker AFC.

When confidence dropped in the summer of 2011 AFC’s price was not immune to the panic that was sweeping the markets.

Technically, as long term interest rates were dropping AFC’s price should have been rising.

In fact, the Baby Bond dropped to its August 2011 low on the very same day as BDCS AND the S&P 500.

When confidence vanishes there are no safe harbors.

However, AFC’s price drop was far less drastic than BDCS and matched the S&P’s decline. See the chart from Yahoo Finance.

What’s more, as a note to investors who can’t take too many sleepless nights where their investments are concerned, AFC’s price recovered to the April 2011 level within 3 weeks of reaching that low.

The S&P did not cross that level till January 2012  and (as we mentioned above) BDCS did not get there till September 2012.

 

 

 

 

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