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BDC Market Recap: Week Ended September 29, 2017

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BDC COMMON STOCKS

Rule No 1

Don’t fight the tape.

Last week, the BDC Sector – as measured by the Exchange Traded Note with the ticker BDCS, itself based on the Wells Fargo BDC Index- was up to $21.46 from $21.27.

Nonetheless, we were not convinced the market had taken a turn for the better. Much discussion ensued.

This week, BDCS is up to $21.98. The WF Index is up 0.76%.

Better Than (We) Expected

We concede that we were too skeptical and – for reasons unknown – the BDC Sector is in a bit of a bounce.

It’s not just the price of BDCS (we are getting close to a dividend pay date after all).

34 BDCs are now trading over their 50 Day Moving Average, versus 21 last week and 14 the week before that.

Even the harder-to-beat 200 Day Moving Average has 15 names in positive territory versus 10 last week.

20 BDCs are trading within 10% of their 52 Week Highs, up two from last week.

New Perspectives

Plus: using some new tools drawn from Seeking Alpha, we see that 34 of the 46 BDCs we track are up in price on the week.

Over a 52 Week time frame only 28 are up in price, suggesting recent price activity has picked up.

Who’s Up ?

The Biggest Weekly Winner is Monroe Capital (MRCC), up by 5.6% in the last 5 days and at a two month high.

Why ? Who knows !

Following behind are Solar Capital (SLRC) and KCAP Financial (KCAP), up 4.9% and 4.6%.

Where KCAP is concerned, we can point to a new business strategy and two Baby Bond debt offerings.  SLRC is a mystery.

Guessing which BDC stocks are going to go up and which down in a short time frame is blessedly hard.

Nothing Ventured

Nonetheless, we’ve been having a go – if only for fun and with the expectation of being appropriately humbled.

At the beginning of the month we used the tools at Motif.com to invest in a portfolio of BDC stocks that we expected to increase in price in the month and quarter ahead.

We chose 8 BDCs and called the portfolio “BDC: Biggest Movers“.

Here’s a chart which shows how we’ve done so far. Our portfolio is in blue. The green is the S&P 500. Motif says we’re up 2.6% in a month.

6 of the 8 stocks we chose a month ago are up in price.

Comparing against the SA data, 3 of the 5 BDCs with the biggest price increases in the month were amongst the 6 up.

The two BDCs that went down rather than up were only modestly so: (0.5%) and (1.6%). On SA’s list the Biggest Monthly Loser (MFIN) was down (8.1%).

However, we missed the big success story of the month, far ahead of all other stocks: OHAI, which is up 26.3%. Bummer.

On Monday, we will re-balance and provide another update in a month.

Maybe the BDC Reporter really can foretell the future. Or,  we got lucky first month out. We really don’t know.

Our readers will be the first to find out.

Back To The Bottom Of The Pile

With this week’s burst of market enthusiasm “only” 11 BDCs are trading within 10% of their 52 Week Lows. After eliminating names which are also within 10% of the 52 Week High.

Last week the number was 18, which is quite a shift.

The BDC closest to its lowest level is Prospect Capital (PSEC), which has never recovered from recently cutting its dividend and hearing “I Told You So” from every Tom, Dick & Harry.

Even PSEC,though, is up ever so slightly from last week and above its 52 Week Lowest,.

Number Two of the BDC dregs is Medley Capital (MCC), another perennial under-performer and with a fund controlled by its Investment Advisor no longer buying shares regularly, MCC has slipped below $6.00 a share.

The Bronze Medalist in this unfortunate category is Alcentra Capital (ABDC), which was on the rebound from its travails till a couple of days ago. Then: wham ! The stock is back down at $10.71 from $11.22. But still way above it’s panic price low of $10.20.

Where Are We ?

The BDC Sector is hardly back in “Bull” mode. Prices are just recovering to the August level.

BDCS is still (7.8%) off the March 2017 high and 3% off in price terms YTD.

However, we appear to have scraped the figurative bottom and moved up.

That day was September 6, 2017  and BDCS was at $21.12.

The BDC Reporter continues to believe we’ve got further to drop during calendar 2017 than the level of September 6th, but we’ve been fooled before.


BDC FIXED INCOME

Turmoil

If Mr Market is feeling better about BDC common stocks, the fixed income sector is in a mini-upheaval.

There have been 3 issues redeemed of late, and several new issues launched.

More To Go

Another 3 issues are about to be paid off in the next few weeks and have slumped to their par plus accrued interest price level.

As a result, and after chopping and changing our Fixed Income Table, the median price has dropped to $25.38 from $25.45 last week.

In any other market a (0.3%) drop would be barely noticed. Where BDC Fixed Income is concerned it’s Big News.

Overhang

With one-third of all the fixed income issues we track (12 of 36) potential candidates for getting refinanced or paid off before the end of 2017, the drama will not be ending any time soon.

Some Things Don’t Change- Much

Nonetheless, many of the metrics we look at every week remain mostly undisturbed:

4 “Baby Bonds” still trade over $26.00 a share, up from 3 last week.

As Bad As It’s Gotten

Only 3 issues trade below $25.00 par.

The new KCAP Financial Baby Bond with the ticker KCAPL ended the week at $24.97. Capitala Finance’s (CPTA) Convertible with the ticker CPTAG is just below par at $24.95.

The biggest casualty this week is Medallion Financial‘s (MFIN) Baby Bond with the ticker MFINL which has slipped backwards after weeks of scratching its way back towards par value.

MFINL ended the week at $23.35, losing nearly a dollar on the week.

We were wondering aloud just last week why the slumping stock price of MFIN did not translate through to MFINL. Now that’s changed but this week it was MFIN’s turn to move up !

Keeping Score At Home

The BDC Reporter has been constantly amending our Fixed Income Table – available only to subscribers – all week.

Here is a link to the latest version. (If you return to this link in the future and we’ve made even more changes, the Table will have changed too).

We’ve not only changed some of the names on the list, but also altered some of our predictions about who might get redeemed and who not.

Harsh Truth

However, the truth of the matter is that just about every BDC fixed income issue that could get paid off is in danger of getting paid off by year’s end.

Plus, there are 8 more issues that will become “redeemable” in 2018.

When we do the math, we recognize that two-thirds of all the BDC fixed income issues in our Table right now could be gone by the end of next year.

Shake, Rattle And Roll

We don’t think the BDC Fixed Income sector – in its infancy as an asset class – is going away, but it’s constituent issues and issuers are up for major shifts in the quarters ahead.

Some investors who’ve had a relatively easy time with these issues might get bedeviled  by the constant “Will They ? Won’t They”.

Moreover, it’s most likely that the 6.7% average yield of the moment may dip below 6.0% as chief financial officers across the BDC space sharpen their pencils and field calls from anxious investment bankers.

We will continue to monitor, analyze and comment.


DISCLOSURE

Here is our full disclosure table where we identify which BDC common stocks and fixed income issues we hold.

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