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BDC Market Recap: Week Ended September 22, 2017

BDCs:
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BDC COMMON STOCKS

Bounce

As our readers know, we use the UBS Exchange Traded Note with the ticker BDCS – which itself uses the Wells Fargo BDC Index – as our measuring stick  for the sector.

This week, like last week, BDCS ended higher: at $21.46 versus $21.27 and $21.20 two weeks before, and well above the lowest recorded YTD level of $20.99.

Apparently, the BDC Sector is clawing its way back.

Or is it ?

Mixed Message

Some of the other metrics we use – like the number of BDCs trading above their 50 Day Moving Average – jumped up to 21 from 14 the week before.

However, using the 200 Day Moving Average, only ten BDCs are in positive territory.

Like last week, 17 BDCs out of 46 are trading within 10% of their 52 Week High.

When we look at the number of BDCs trading within 10% of their 52 Week Low and eliminate those on the 52 Week High list mentioned above, we record 18 names.

That’s just one BDC less than last week, when there were 19.

Not Getting Excited

We’re not so sure much has changed in the last few weeks.

The Biggest Gainer – using the 50 Day Moving Average metric – is the smallest BDC out there: OHA Investment (OHAI).

OHAI is up a whopping 12.55% over the 50 Day Average.

The BDC Reporter has been mentioning the upward march – which includes an occasional slide back – of OHAI all week.

However, all this price activity is over a BDC with a tiny market capitalization and which has been at the lowest of lows before the last week.

In fact, the sudden enthusiasm of some buyers MAY have more to do with the possible liquidation of OHAI than its future as a going concern.

No Explanation

We are more intrigued by the recent upward trend of another small and under-performing BDC: Horizon Technology Finance (HRZN).

Since August 22, HRZN has been headed almost continuously up, gaining nearly a dollar a share to reach $11.01 on Friday September 22.

Why ? Embarrassingly, we have no idea whatsoever.

Too Low

Another Comeback Kid – and number three on the 50 Day Moving Average beating list- is Triangle Capital (TCAP).

That’s up from $12.87 on September 7 to $14.03 on Friday.

In that case,  we’re less surprised. TCAP became “oversold” (aka given up for dead by many shareholders) after warning of a dividend cut coming and dropped precipitously from over $20 a share earlier in 2017 to that September 7 low.

A rebound was in order and that seems to have happened.

Dead Cats Bouncing ?

All three top moving BDCs are under-performers getting revalued, rather than a sector wide march up in prices based on a broader market enthusiasm.

Contrary Evidence

On the other hand, we do note that some of the better performing BDCs that are perennial investor favorites like Main Street (MAIN) and Golub Capital (GBDC) and Goldman Sachs BDC (GSBD) and TPG Specialty (TSLX) all moved up on the week.

So go figure.

We Quote Ourselves

We did predict last week that the BDC price trend did seem to be to the downside (and we’re sticking with our dismal view).

On the other hand , we also said: “Mr Market is highly unpredictable and can surprise in every way imaginable and a few which we cannot”.

We stand by that too.


BDC FIXED INCOME

Changin’

Right off the bat, we should say that we’re changing our nomenclature. We’ve been referring to “Baby Bonds“, which is correct for most BDC fixed income issues but not all.

We were reminded this week – with Gladstone Capital ‘s (GLAD) issuance of a new Term Preferred that not all BDC fixed income issues are “unsecured notes”.

So we’re going to go with BDC Fixed Income, which does not run off the tongue but may be more accurate.

Like A Rock

Anyway, notwithstanding some important changes in the constituent issues,  BDC Fixed Income remained very stable, with the median price at $25.45, just above the week before and identical to two weeks earlier.

As always, only a couple of the 36 issues we track (spread over 25 BDC issuers) were below $25.00 a share and none lower than Medallion Financial’s (MFIN) Baby Bond MFINL at $24.40.

At the other end of the spectrum, we had 3 issues trading over $26.00 a share, versus 4 last week.

Cloud

For existing holders of BDC Fixed Income issues of all stripes the over hanging cloud is the risk of being paid off by BDCs anxious to reduce their high interest costs.

The BDC Reporter has been updating its BDC Fixed Income Table (note the new name) and adding new features for our Premium subscribers.

We count 17 issues which have either been formally slated for redemption, or which can be called at “Anytime” or which will become redeemable by calendar year end.

As you’d imagine any BDC Baby Bond or Term Preferred or Convertible that could get “called in” by its issuer on very short notice tends to trade at a modest premium to par as investors seek to avoid any surprises.

Activity

This week, Stellus Capital (SCM) redeemed its 2019 Note with the ticker SCQ, which has been replaced with a new Baby Bond with the ticker SCA.

About to be paid off is Harvest Capital’s (HCAP) Baby Bond (HCAPL), which is being repaid this week-end ! Harvest, too, has launched a replacement: HCAPZ.

Coming up next are issues from Gladstone Capital (GLAD), Apollo Investment (AINV) and Great Elm Corporation (GECC).

Crystal Ball

To help our readers who are fixed income-inclined, we seek to estimate which BDC might repay its fixed income issues early and which not (see column W in the Table).

Still, with so many issues to track it’s been very difficult to claim infallibility, and we don’t.

As we’ve said before, there is a good chance we’ll see many more fixed income issues redeemed before the year is out.

We expect the total number of issues outstanding will remain similar to the current number, but the average yield is likely to continue to be pared down.

Ironically, that in turn may flush out more BDC issuers and cause an increase in the BDC Fixed Income universe in 2018.

No Worries

While we wait to see what happens, the BDC Reporter can say with some confidence that investors appear to have virtually no credit concerns about ANY of the Fixed Income issues outstanding.

As we’ve seen even MFIN  – whose stock price has been dropping back after a brief surge on concerns about its future – has seen its Baby Bond regain its popularity and trading at a YTD high.

The long term returns from investing in BDC Fixed Income may be a little lower than before – and investors can stub their toes with unexpected early repayments – but this remains a “Sleep Well At Night Investment”.

15 Months And Counting

We’ve been invested in BDC Fixed Income since 2012 and know that this incredible price stability- which began roughly around June 2016 after a 6-8 month roiling-  will not prevail in all market conditions.

We pointed out as much in our most recent article about Gladstone Capital and its Term Preferred.

However, for the moment,  there is nothing that seems about to disturb the sound sleep of BDC Fixed Income investors.

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