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Breaking News: Sector Hits Year-To-Date Low

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NEWS

As the trading day of Wednesday October 25, 2017 develops, and the BDC Reporter reviews what’s happening in the markets – as we do several times a day – it’s becoming clear that the BDC Sector is going through a mini sell-off:

  •   43 of the 46 BDCs we track are down in price on the day.
  •   BDCS – the UBS Exchange Traded Note linked to the BDC Wells Fargo Index – is at a YTD low price of $21.06.
  •  The Wells Fargo Index is down (1.3%) intra-day.
  •  3 well known BDCs have hit new record lows. We’ve already written about PSEC. Add to the list: ABDC and CPTA.
  •  Including the 3 names above, there are 10 BDCs within 5% of their 52 Week Lows.

See the BDC Daily News Table.


ANALYSIS

Although there is general weakness across the sector, most of the price pressure is on the BDCs that have under-performed the most of late.

This is confirming our suspicion – expressed in our latest BDC Market Recap – that there is a bi-furcation going on:

Investors don’t want to abandon the BDC Sector with its juicy yields and still low defaults overall. This is not like the many months between July 2014 and February 2016 when most every BDC dropped in price to varying degrees.

Instead, the money is flowing to the Winners and away from the Losers.

Earnings season is coming up in less than week and investors –  both institutional and retail – are positioning themselves and trying to avoid being caught off guard by poor results.

This conservatism – which is likely to be justified if our own projections are correct – has taken most of the wind out of the market.

Besides the stats mentioned above, we note that only 10 BDCs are trading over their 200 Day Moving Average.

Here’s a screenshot of the names. Look to the last column. Note that pretty much all are expected to maintain or increase their distributions.


VIEWS

Less than 2 weeks ago the BDC Sector was in a bit of a bounce up, which surprised us. However – then as now – we were skeptical that the Good Times were coming back to the BDC Sector (February 2016-March 2017).

Here’s what we wrote:

Does this BDC bounce back continue in the weeks and  months ahead ? A year from now, will we be higher or lower where the Wells Fargo Index and most BDCs prices are concerned ?

The BDC Reporter – looking at our own BDC-by-BDC review of fiscal results year-to-date and projections we make for the rest of the year, and remembering that we are coming off a period of Very High Prices – is not sanguine.

Like a warm and sunny day in London in October, this too shall not last.

As always, though, “there’s winners, and there’s losers” (to quote John Mellencamp), but probably less of the former and more of the latter.

Last time we counted (a minute ago), the BDC Reporter’s own projections still show 29 BDCs likely to post lower recurring earnings per share in 2017 than 2016, and 17 equal or better results.

The current market conditions seem to confirm our pessimism (please don’t shoot the messenger !).

However, BDC Earnings Season may surprise, and/or the defensive sell-offs we’re seeing now – which are still relatively mild for 4/5ths of BDCs- may turn round.

After all, we’re still in an enormously optimistic period where all investing is concerned.

In the short run, though, the trend is not your friend.

A week from now – as the results pur in – this could change.


INVESTMENT STRATEGY

Common Stocks

Generally speaking, we’ve taken our own advice where BDC common stock investing is concerned of late.

Despite the sell off since March 2017  (BDCS is down 12% from its high), we’ve continued to under-weight common stocks in our overall investing which continues to be 98% in Fixed Income in our Fund in terms of total assets.

Elsewhere, in our Special Situation strategy, we only have one position (ABDC).

In our Long Term Income strategy we’ve gone from 5 positions to 4 after selling off Newtek Business Services (NEWT) out of an abundance of caution following the FBI raid we’ve reviewed earlier.

As a glance at the Watch List Table shows, none of the 4 BDCs we hold are caught up – as yet – in the race to the bottom and all are expected – by us at least – to maintain their distributions for another year.

Some in the market continue to doubt the sustainability of ARCC’s distribution but we do not, and this quarter will tell us more.

Overall, we take nothing for granted but we don’t sense any disasters coming from the other 3 names either.

However, prices will have to drop much more dramatically before we can begin adding to our Long Term Income strategy.

We have identified 14 Prospects. We own 4. The remaining 10 (including the temporarily troubled NEWT) remain too expensive by our internal valuation metrics.

As a BDC investor, this YTD Low is just a way station to potential additional investments in BDC common stocks to have and hold for the long term.

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