BDC Market Recap: Week Ended March 3, 2017
Week 9 of 2017, and the BDC rally took its foot off the accelerator with two-thirds of earnings season gone.
The UBS Exchange Traded Note with the ticker BDCS, which we use as our guide, dropped to $23.37.
That’s the lowest level in two weeks plus.
Coincidentally or otherwise, the week included an almost cast iron promise by Fed Chairman Yellen to raise interest rates in March.
Then: repeat and repeat and repeat.
Unusually, BDCS was down (albeit modestly in the scheme of things) as the three major indices-which BDCS has been following like Pavlov ducklings for over a year-were up.
See the 5 Day Chart here.
For what it’s worth “only” 33 of 45 BDCs were trading above their 50 Day Moving Average, and 38 above the 200 Day.
That’s down from 35 and 39 respectively last week.
Still, we did a little history hunting in our own Weekly Recaps:
Back in mid-December 2016, the number of BDCs above their 50 Day/200 Day Moving Average prices was 31 in both cases.
OFF THE 52 WEEK HIGHS
The number of BDCs within 10% of their 52 Week Highs slipped in Week 9 to 35 from 39.
Still, there was value shopping going on amongst some of the previously beaten down names.
Apollo Investment (AINV) was at the top of the 52 Week price list at a price $6.43.
A few months ago, the energy loaded BDC was at a low of $5.03.
That’s a 27% gap between low and high in less than 12 months…
Like last week, there are only two BDCs within 10% of their 52 Week Low.
As we explained in our prior Weekly Recap, only Fifth Street Finance (FSC) is being “punished” by the market.
The larger sized BDC- which recently cut its distribution again-reached a new all-time low of $4.38.
TICC Capital (TICC) cut its quarterly distribution from $0.29 to $0.20, but the stock price remains closer to its 52 Week High than its 52 Week Low.
A candid FS Investment (FSIC) suggested on its Conference Call that its dividend might get cut in the quarters ahead.
The stock price took a 10% beating, but in a 52 Week context, FSIC remains well off its lows, as this chart shows.
PRICE VERSUS PERFORMANCE
By the BDC Reporter’s count 18 BDCs have seriously stumbled or even fallen on their face in terms of performance in the past 12 months.
In most cases that has included a distribution cut during the period.
Nonetheless, the BDC Sector has remained in rally mode as if investors believe the worst is behind them and are looking for “bargain” opportunities amongst both Winners and Losers.
TROUBLE AHEAD/TROUBLE BEHIND
Yet, when the BDC Reporter projects out into the next year we estimate that at least a third of all BDCs still have pressing problems of one kind or another in the “medium to large” category.
We’ve undertaken a Current Dividend Sustainability Analysis for every BDC out there and given each a rating of Highly Likely (to sustain their distribution), Likely, Unlikely and Highly Unlikely.
That’s projecting out to March 31, 2017.
Last time we counted (which was just now) we had 18 names in the Unlikely and Highly Unlikely (to be able to sustain their current distribution) column.
Hmmm. Paying more while getting less…
TWO WILD CARDS
We have the greatest respect for the price setting abilities of the market so the BDC Reporter is reaching for explanations for this apparently unfounded and unbounded enthusiasm.
The market may be looking forward (as it’s famously said to do) to the prospect of higher interest rates and legislative change.
Higher LIBOR rates are promising to boost many BDCs earnings if and when the Fed implements a multi period increase in rates.
We wrote a Trends article this week doubting whether the broad based pay-day some investors are expecting will come to pass, while simultaneously conceding that few seem to agree.
Harder to handicap are potential changes in BDC rules under a Do-Whatever-You-Want Trump administration that could double BDC leverage, loosen the 30% Non Qualifying rule and allow a host of other actions previously verboten.
Most of the major BDC asset managers have been lobbying for these critical changes to the BDC format while swearing that they will not abuse the huge increase in leverage that they will be allowed to take on.
Given that many of these same BDCs have already (legally) skirted the existing BDC leverage rules in a host of ways, we are not convinced.
Whatever the long term impact on the stock price volatility and credit losses at BDCs (of course we are pessimistic), the short term result could be higher Earnings Per Share.
“Aprez Nous Le Deluge” may be the mantra of analysts looking mostly to what would come first: higher earnings.
We’ll be reviewing the progress of the new BDC legislation (whose only opponent appears to be the BDC Reporter) once earnings season wraps up.
Apparently, BDC Baby Bonds did not get the memo that fixed income is headed to perdition.
Our admittedly rough and ready way of evaluating our index of 35 publicly traded BDC Baby Bonds and Preferreds moved up from $25.64 to $25.69.
(We count the median price).
Furthermore, two-thirds of the issues were trading above their 50 Day Moving Average, and slightly more compared to the 200 Day.
Just for the record (and with a slightly different mix of issues) the median price in mid-December 2016 was $25.32.
As has been the case for many weeks, all but one of the Baby Bonds are priced well above $25.00 par.
Three are 3 at $26.00 or above.
We’d been anticipating that more BDCs would be issuing publicly traded Baby Bonds in 2017.
You know, fixing your liabilities and taking advantage of higher rates on your assets.
We’d also been expecting more existing BDC Baby Bond redemptions. By our count, more than half the issues out there can be redeemed at will.
In that case, BDCs would be looking to reduce their cost of debt capital (an increasing problem with LIBOR up, and SBIC debenture interest rates fixing higher).
Neither has happened in any great way since a wave of transactions by Hercules Capital, Saratoga, Medley Capital and other earlier in the year.
Maybe once earnings season is over ?
We did hear from FS Investment (FSIC) that they considered issuing public Baby Bonds but the market pricing was not attractive.
However, FSIC has other issues to consider right now so that might not tell us much.
As a result, and with competition from privately placed Convertibles, ever narrower spreads on bank Revolvers and the ever wider ability to tap the equity market, Baby Bonds are in a quiet period.
We wouldn’t be surprised,though, to see prices drop if the memo about higher medium and long term interest rates ever does come through.
The solidity of existing prices in recent months has probably had more to do with increased confidence about credit quality than the direction of rates.
With leveraged loans trading back at or very close to par most of that confidence is priced into Baby Bond prices.
Where the risk free 5-10 Year Treasury rates go may define where BDC Bonds get priced going forward.