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BDC Market Recap: Week Ended July 21, 2017

BDCs:
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BDC COMMON STOCKS

NO MO’

On the second week of the second half of the year the BDC sector picked up slightly with BDCS ending at $22.36 from $22.21 the week before.

Still, as the chart shows BDCS was at its YTD low as recently as July 12 , as the $0.483 quarterly distribution was paid out.

When the prior distribution was paid out – on April 10, the price was $23.29, or 5% higher.

At its very height back on March 31, BDCS was 7.6% higher than when the latest distribution was paid out.

From that standpoint we can see this long-in-the-tooth bull rally has slowed down.

RELATIVELY SPEAKING

Yet, if we pull back and look at a medium term chart, BDCS is still 24% or so above the February 2016 low and trading only 20% off its top level, close to December 2016 levels.

The momentum slowdown has made beating the 50 Day Moving Average easier and 26 BDCs are doing just that versus 22 the week before, out of 46.

That’s harder to do against the 200 Day Moving Average bogey with only 19 this week in that category versus 21 a week ago.

Using how many BDCs are trading within 1% of their 52 Week Highs (one of our stats) we find 23 there, versus 21 last week.

PARSING THE DATA

Interestingly 12 are trading within 10% of their 52 Week Low.

The interesting part is that there are duplicates from the 52 Week High list, including Ares Capital (ARCC) , TCP Capital (TCPC), New Mountain Finance (NMFC) and the Carlyle newbie CGBD.

DOUBLES

This suggests very low price volatility in certain quality names as owners are unwilling to sell and buyers are unprepared to pay up any further.

We’ve included a 1 year chart of ARCC’s stock price and compared it to highly volatile Fifth Street Finance (FSC) to show how little the stock price has moved, keeping its high-low range very tight.

Historically the price action of FSC is much more the norm than ARCC’s current path.

All this suggests a still very stable “Bull Market” but without the euphoria and sense of boundless possibilities associated with markets that are out of control.

MIXED COMPANY

There are 8 names that are really under-performing on that 52 Week Low list.

Most have been there for awhile but there are some surprise names such as Triangle Capital (TCAP), FS Investment (FSIC) and Hercules Capital (HTGC).

However, they are hardly at bargain basement  prices: just on the low side using this limited period metric. Two of the three are still trading above NAV, and the odd one out (FSIC) is only a few percentage points away.

SOME ADRENALIN

This would make for a very dull market if not for the occasional Special Situation, as we call BDCs suddenly in the throes of unexpected and/or not fully quantifiable changes.

This week FSC jumped in price to be 22% above its 50 Day Moving Average, 17% above the 200 Day and moved sharply away from its 52 Week Low: 40%.

The BDC Reporter – always the spoilsport- slapped an Over Valued label on the stock much to the disgust of many shareholders looking for an even higher price level.

Still, the price peaked at $5.72 intra-week, before closing at $5.50.

On a smaller scale, the same thing happened to Fifth Street Senior Floating Rate (FSFR) and the BDC Reporter also called out “Over Valued”. That stock too has dropped off at week’s end.

Full Disclosure: We have both FSC and FSFR on our Watch List to short, and own FSC’s Baby Bonds. Re: the former, we’re waiting for a new wave of positive market excitement to pull the trigger.

The third Big Mover was Medallion Financial (MFIN), which we discussed regarding its loan amendment, and appears to have caught a wave of renewed optimism/speculation.

The stock went from $2.27 to $2.52 in 5 days, up 11%. That’s good old fashioned price volatility.

Full Disclosure: We are Long MFIN in our Special Situations portfolio, but accept that what goes up could readily come down as the BDC is still in crisis.

ENDING WORDS

BDC public stocks continue to be in a “bull” trend, but everyone is looking around and not doing much.

Except when something important shifts – or the market suspects as much.

Then the traditional tendency of stock prices to overshoot or undershoot comes into play for investors with a shorter term attitude, nerves of steel and willing to jump to conclusions.

We’ve been in those ranks of late but have no illusion that as the market peels the onion of this minority of news-driven stocks that prices could go either way and fast.

You do your research and you take your chances.

Everything else remains “expensive” and stable.


BABY BONDS

NOTHING HAPPENING HERE

Not much to report on the trends in BDC Baby Bonds during the week.

The median price on our mostly comprehensive list of 34 securities was unchanged at $25.59.

CEF Advisors own Baby Bond index was up 0.42% on the week, continuing that squiggly line upward on their chart.

RUNNING THE NUMBERS

Slightly more BDCs traded above their 50 and 200 Day Moving Averages: 15 and 13 respectively.

Last week the numbers were 8 and 18. The week before that: 15 and 19.

As usual several Baby Bonds (5 in this case) traded at $26.00 or above, and as usual the only security trading below is MFINL at $23.82.

Intra-week MFINL – on the back of investor “optimism” (if that’s the right word about fear mixed in with greed)-  about Medallion Financial pushed the price to $24.41.

NEWS ? WHAT NEWS ?

There was no news of any new Baby Bond issues or repayments in the week.

Triple Point Venture Growth‘s (TPVG) Baby Bond with the ticker TPVZ was called some time ago and will be retired on August 13, and is priced at $25.06.

WHO’S NEXT ?

Otherwise, the guessing game continues as to which Baby Bond already beyond its non-redemption date will get called.

Investors are canny and don’t bid up the price of securities deemed likely to say good-bye prematurely to their holders.

We count (outside of TPVZ) 10 Baby Bonds trading at $25.50 or below whose early redemption limits are past or are very close.

That’s roughly a third of the universe and more evidence supporting last week’s contention that this “risk” is likely to put a lid on Baby Bond prices.

WENT ANOTHER WAY

The BDC Reporter had been concerned that MVC Capital (MVC) might redeem its Notes with the ticker MVCB, and they still might.

However, the first use for the cash MVC recently acquired by selling its largest subsidiary is going to a stock buy-back program in the form of a “modified Dutch Auction”.

Good for Note holders hoping to earn that 7.125% yield a little longer (the maturity date is 2023) but less good from a credit standpoint as cash is going out, leaving less assets.

MVCB closed at $25.36.

CASH IS IN HAND

Elsewhere, KCAP Financial (KCAP) announced a drastic restructuring of its balance sheet, with many assets to a new JV under its control.

That’s giving KCAP a large amount of cash proceeds which are going to repay its debt securitization, with some monies left over.

We wondered if that extra cash might not be used to retire its Baby Bonds with the ticker KAP , which have already been reduced by partial pay-offs.

Full Disclosure: We sold our entire KAP position just to be careful. The closing price is $25.25, slightly lower than what we sold our position for, and $25.49 before the news broke.

CONCLUSION

BDC Baby Bonds had the quietest of weeks in what is already a somnolent corner of the financial markets.

That’s In A Good Way.

Investors and would-be investors are mostly waiting for the other shoe to drop about issuances and redemptions.

Credit concerns appear to be essentially non-existent at this stage.

We refer you to that long-in-the-tooth BDC common stock bull rally for an explanation.

If you can guess who’s going to come and who’s going to go you can save yourself a few pennies, nickels or dimes a share.

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