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Market Recap: Week Ended November 17, 2017

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COMMON STOCKS

Half & Half

Early in the week there was an unusually level of  BDC stock market activity.

To the point that we felt impelled to write an article about the subject: “Stocks All Over The Place“.

However, by week’s end – not surprisingly – the market had settled down.

By Friday November 17 just as many BDCs were down in price as up (or is that vice versa ?) for the week.

That different type of measuring stick – the UBS Exchange Traded Note with the ticker BDCS – was up to $21.13.

From $20.83 the week before (a 1.1% boost), and $20.70 the week before that.

The Wells Fargo BDC Index – from the Monday open to the Friday close- was up 2.0%.

Big Three

There were just 3 Big Winners on the week that crossed our 3% move threshold.

The BDC that is both cult (please have a look at the number of articles on Seeking Alpha, including several this week alone) and conundrum (dip into any 10-Q and try to follow what’s happening across 11 different business lines) shot up a remarkable 15.6% on the week.

From its lowest intra-day point (which may have listed a split second, for all we know) PSEC is up 25% !

Obviously, the value buyers finally kicked in – probably inspired by insider purchases during the week.

We have PSEC on our Special Situation Watch List for good reason.

Fundamentally, though, nothing changed over at PSEC.

Terrible Two

Also up on the week – though less dramatically- were ABDC (6.4%) and GECC (6.0%).

Both BDCs have been punished by investors of late: ABDC due to very poor results and an equally poor answer to the obvious question of “What Happens Next ” and GECC by mediocre results (NAV dropping- again) and concerns that insiders want to get out as much as they can.

Clearly Me Market had decided that enough was enough and value buyers stepped in.

Why Oh Why ?

ABDC was helped (after initially being hurt by its former CEO selling a bunch of shares) by insider purchases and a doubled (but still minor) buy-back programme.

Amusingly, GECC’s rebound was probably due to surprise purchases of stock by a director and an officer, reported on Form 4.

Many speculative buyers take great comfort from seeing “skin in the game” from insiders and distress when that’s headed out the door.

Again, though, from a fundamental point of view, nothing changed at GECC. No press release and no SEC filing that’s not a Form 4.

Four Fallen 

There were 4 Biggest Losers of (3%) or more on the week, but no double digit drops.

The hardest hit was SAR, down (4.6%).

Why ? you might very well ask. There are no clues in the news stream. We are not aware of a portfolio company getting into trouble, but we’ve not methodically checked.

SAR was at a recent peak (11-8) of $22.73. Maybe profit taking ? There was unusually high volume in mid-week and the stock dropped to $21.34 before closing on Friday at $21.54.

Also down for no obvious reason was TPVG. Also down was MFIN, but that was probably profit taking as investors have recently flooded back into the soon-not-to-be-a-BDC. The price went from $2.12 to $2.88 faster than you can say  “speculate”, but fell back to $2.68 on Friday, up 10% over 4 weeks.

New Plan

OHAI was down on the week by (3.4%), which we found surprising. When reporting its now traditionally terrible earnings for the IIIQ 2017- and reporting ever lower Net Asset Value – the Investment Advisor hinted (while also indicating that’s all they were going to say until a solution is wrapped up) that change was a’coming.

This is a micro-BDC with a few groups with a special interest so we were surprised that no one stepped up to buy on the news, which suggests that was baked into the prior unexplained surge in the price earlier in the year (which the BDC Reporter covered relentlessly) or the outlook is not so good, or something else.

We have OHAI on our Special Situations Watch List for investors with nerves of steel. The kind of investor who waited for PSEC to drop as low as it did and then jumped in with both feet.

All Clear Sounded ?

Is the rocking and rolling over for the BDC Sector ? Much may depend on the results coming out of the BDCs that have not reported earnings. In the spotlight are the two former Fifth Street entities (OCSL and OCSI-formerly FSC and FSFR) – now under Oaktree control.

For some weeks now their stock prices- which had rallied on the news of Fifth Street Asset Management’s eviction – have been dropping. Investors may be worrying that Oaktree might clean out the Augean Stables that are OCSL and to a lesser degree  OCSI’s portfolios. That might result – the worry goes- in lower book value, earnings and an early dividend reduction to set things aright.

When we get the actual results from these two BDCs, the market will let out a sigh of relief or some other sound, which might reverberate across the sector up to a point.

Not So Bad

Still, in the category of Be Grateful For Small Mercies, looking back on results achieved so far by the BDCs that have reported there have been only 3 clear cut, head-in-your-hands blow ups (ABDC, CPTA and TCAP). There have been plenty of Death-By-A-Thousand-Cuts results – admittedly a more subjective criteria. Here ‘s our list of BDCs that just continue to slowly melt away like a snowman in the spring: AINV, BKCC, CMFN, FSIC, GARS, GECC, PSEC, TCRD and TICC.

On the other hand, there were a few November surprises which have boosted investor spirits. HTGC promised to give up its quest to transform its status. (We remain skeptical but that’s another story). That helped the stock, as did its results. ARCC did not cut its dividend as some had unwisely suspected. HRZN had better than expected credit and that boosted the stock. MVC undertook a full core press to impress its shareholders, which created new highs. GAIN continued to boost both NAV and stock price.

Reliable BDC performers continued to deliver like TSLX, SCM, WHF , FDUS, TPVG, SLRC, SUNS and PFLT amongst others.

These are the Best Of Times for a few BDCs and the Worst for a few more, but for most it was a Business-As-Usual quarter. But we’re not done yet…


FIXED INCOME

Drama

BDC Fixed Income had its own drama for the week.

Median prices of the issues we track were at $25.47, up from $25.40 the week before.

However, the story was less about the averages – which were pretty much in line with what has come before – but with a couple of  issues dropping below par.

These were the two Capitala Finance Unsecured Notes: CPTAL ($24.91) and CPTAG ($24.56).

This suggested – for the first time in a long time – that credit concerns were affecting BDC fixed income prices.

Ironically, the only BDC Baby Bond that’s been consistently below par for ages – Medallion Financial’s MFINL – jumped right up to 5 cents off par : $24.95.

Keep Calm And Carry On

[If you’re wondering, the BDC Reporter is far from panicking itself about whether CPTA will have the resources to repay its obligations.

We reviewed the CPTA portfolio at September 2017. CPTA had $471mn at FMV of investments and $52mn in cash.

Even  after we deduct every investment written down from cost ($43mn) and deduct all SBIC debt owed ($168mn), there are $312mn in net assets left to cover $123mn of Unsecured Notes and Convertible debt outstanding.

That’s coverage of 254%.

We have no doubt that number could get worse but with CPTA having a renewed commitment to lower credit risk investments, there’s enough margin for further errors to pop up].

Capital Markets Action

There was also activity of another kind during the week.

Two BDCs issued medium term Baby Bonds at sub-5% rates (4.5% in both cases): Solar Capital (SLRC) and Main Street Capital (MAIN).

SLRC was paying off long dated, expensive debt with medium term, lower cost debt.

MAIN added a third Unsecured Note to its ever growing balance sheet.

Both received an investment grade rating.

MVC – as we discussed last week – refinanced its existing expensive Baby Bond with the ticker MVCB with a lower yielding issue with the ticker MVCD.

Till MVCB gets officially paid off, both issues are currently outstanding.

No Need

Unfortunately for investors willing to be paid 4.5% for 5 year BDC Unsecured Notes, neither MAIN nor SLRC’s new debt was made in a form readily accessible by retail investors.

The BDC Reporter cannot help pointing out that BDCs are anxious to have retail investors buy their common stock but care less when it’s time to place their debt; limiting their investment choices.

Life – and BDC investing – is not fair and investors often appear to be far down the pecking order of issuer priorities.

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