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BDC Market Recap: Week Ended July 14, 2017

BDCs:
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SAME OLD

On paper, the BDC Sector – if measured by the price performance of the UBS Exchange Traded Note with the ticker BDCS – dropped on the week. By 2.2%. To $22.21. See stock price.

However, adjusted for the just paid out $0.483 distribution intra-week, things are just where we left them last week and since early May: in the same place.

We’re now two months into a somnolent “bull market”, off the highest highs  but still at premium prices.

PERIODIC TABLES

Let’s go to our regular metrics:

22 BDCs are trading at prices above their 50 Day Moving Average, out of 46 that we cover. The number was 19 last week.

21 BDCs are trading above the 200 Day Moving Average. Here there is a noticeable upward move versus last week’s 14.

25, as compared with 26 last week, are within 10% of their 52 Week Highs.

GETTING SPECIFIC

However, there are only 3 individual names worth mentioning where price change is significant.

Of course, both Fifth Street Finance (FSC) and Fifth Street Senior Floating (FSFR) – both of whom we wrote about during the week – moved sharply on their change in Advisor news.

However, for both BDCs this is more of a round trip than a true move upwards, as the YTD chart shows. The market lost confidence and prices deflated waiting for news from the Investment Advisor.

Even now neither BDC – soon to change names and tickers – has returned to the levels achieved earlier in 2017.

HARVESTING ?

Flying under the radar is micro-BDC Harvest Capital (HCAP), which has been gaining ground since March 23, when the stock price was $12.81 and is now at $13.99.

We checked our own posts, as well as the BDC’s SEC filings and press releases to see if there was some “news” we missed which could account for the increase.

We found nada.

Sometimes BDCs intending to do a stock secondary see their stock price miraculously rise just in front of an announcement. HCAP’s NAV is at $13.89…

DOWN BELOW

There are ten names at the bottom of the table: within 10% of their 52 Week Low.

Only 8 names need concern us here, given that two are also within 10% of  their 52 Week Highs.

The Fifth Street news has made some space available in the Under-Performing Price category.

Garrison Capital (GARS) continues to be very close to its 52 Week nadir at $8.15 and a (33%) discount to NAV, according to CEF Advisors invaluable BDC Universe table.

More importantly, GARS is trading at just a 7.8x multiple. FSC and FSFR – by way of contrast – are now at 10.7x and 12.8x respectively.

Back on May 29, 2017 we doubted in an article that the GARS distribution was sustainable for another 12 months. At the time, the stock price was at $8.79. Since then, the price has dropped another (7.3%).

PennantPark Investment (PNNT) is one of the 8. This week the former high flier received an analyst upgrade but the price remained flat at $7.41.

SAME OLD

As a closing observation, the BDC Reporter notes that in almost every case – whether a BDC has been under-forming or is expected to cut its distribution -Price To Recurring Earnings multiples remain high.

Optimism  continues to run rampant amongst investors at both ends of the performance spectrum, using that metric as our guide (as opposed to price to NAV).

The BDC Bull Market may be taking a snooze, but it’s at very high prices on a relative basis.  This is causing BDC yields to bunch up, and (according to CEFA) average 9.6%.

Are there opportunities out there ? You betcha. BUT the downside risk is higher than usual so proceed with caution whether you’re buying “quality” or “beaten down” BDC stocks.

DOWNWARD SHIFT ?

As far as we know we’re the only publication which writes weekly about BDC Baby Bond trends.

We try to use this data gazing to provide ourselves – and our esteemed Premium subscribers – with an early warning system of where trends might be headed.

We’re much more interested in where we’re going – as are you – than where we’ve been, but that requires both data and intuition.

This week we’re noting two contradictory trends.

On the one hand, our median price remains unchanged at $25.59.

However, an ever smaller number of BDC Notes are trading at prices above their 50 Day and 200 Day Moving Averages.

This week the numbers were 8 and 10 respectively. Last week 15 and 19. Back in January 23 and 14.

REASON WHY

We could explain this with the fixed income mantra about the market being worried about higher long term rates (which has been the mini-trend of late).

However, we don’t think that interest rates have anything to do with the modest drop in Baby Bond price enthusiasm.

We notice that the best performing Baby Bond in this category is Ares Capital’s (ARCC) 30 Year Bond (AFC) due in 2047. Followed by Apollo Investment’s (AINV) 2043 Bond with the ticker AIY.

Instead, we think investors are being understandably cautious about buying Baby Bonds given that most are past their non-redemption periods and can be called at any time.

GOING

And have been.

KCAP Financial (KCAP) bought in a portion of its KAP issue. As we’ve discussed Triple Point Venture (TPVG) redeemed its Notes (TPVZ) with yet another issue.

Ditto at Capitala Finance (CPTA), which paid off CLA.

More are expected. (An issue we’ve been mentioning for weeks).

Why buy a Baby Bond at a big premium when you could be getting your money back – at par – a few days or weeks later ?

This issue will not be going away. In fact, more and more BDCs are reaching their buy-back date in 2017 alone.

As a result we expect a slight shaving down of Baby Bond prices.

Unfortunately for those would-be buyers the change is unlikely to be very material and reflects greater redemption risk rather than any kind of under-valuation.

TIE UP

We believe there is a similar phenomenon underway in both the BDC common stock and public debt markets: a general strong streak of optimism.

However, it’s also fair to say we are not at a stage of “irrational exuberance” in either category.

You’re not going to find any gold coins on the pavement but you’re not likely to be knocked down by someone rushing to pick up a penny either.

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