BDC Market Recap: Week Ended December 1, 2017Premium Free
BDC COMMON STOCKS
The BDC Sector had a down week by most accounts, with the UBS Exchange Traded Note with the ticker BDCS (and based on the Wells Fargo BDC Index) closing at $20.95, down from $21.26 the week before.
With just a month to go on the year, BDCS is down (7.7%) in price terms, and just 2% over the YTD low reached on November 2.
Also, 33 of 46 BDCs we track were down in a week where most of the remaining BDCs that have a September year end announced their results.
(Only MCC remains. See our seasonal feature, the BDC Earnings Calendar in the Tools section).
A Tale of 4 BDCs And 2 Managers
Of the 4 BDCs that reported this week – each managed by an Investment Advisor with two public funds – the results – and the reactions of the market were very different.
Oaktree Capital’s OCSI (formerly FSFR) fared well – especially by comparison with its sister entity as did PennantPark’s PFLT.
As the chart below shows, both these BDCs price did not budge much on the week, staying close to BDCS.
Look at the purple (OCSI), pink (PFLT) and blue (BDCS) lines on the chart.
Not so favored was PNNT – which saw its recurring earnings fall right to the level of its recently reduced $0.18 quarterly distribution, as well as a lower NAV. Not even the promise of a reduction in fees could boost the stock, down (5.7%).
PNNT is trading at a (21%) discount to book, and a 10% yield.
Since peaking in 2013 just before the BDC bet heavily on the energy sector, PNNT has dropped by more than 50% at its lowest point and is down (41%) as of Friday.
The distribution has been cut by one-third since 2013.
The comeback trail is proving very hard for PNNT, which is down in price terms in every recent time frame you can think of : 1 month, 3 months, 6 months, YTD and 1 year.
First Time Out
Also not impressing the markets was the former FSC -now OCSL and managed by Oaktree Capital. (We wrote a dissertation on the subject during the week). Investors – like the BDC Reporter – appear to be worried that there is another shoe to drop.
Certainly, the dividend – which itself was only recently reset at a lower $0.50 a year pace – is in question. Oaktree did not even announce a number for the coming quarter, but warned the pay-outs would vary with business performance.
Which only suggested to us that the new-to-the-business-of-being-a-public-BDC Oaktree had no clear idea what their earnings are likely to be.
If they don’t know, how can investors ? The answer is they can’t and will just guess conservatively.
As It Was Written
What we do know is that essentially all the predictions we made in our July 19, 2017 article, which we wrote when the warm glow of Oaktree coming on as Investment Advisor was still warming the market’s heart, have been confirmed in OCSL’s earnings release.
The article was explicit enough : “Why FSC Is Overvalued”. Analysts were calling for price targets of $6.0 or $7.0 a share when FSC/OCSL-to-be was at $5.69, and eventually peaked at $5.90.
However, bad loans are bad loans – even if you have an admired asset management firm at the helm- which became blindingly clear when the quarterly and full year results were announced.
Back in July we projected that if things went the way we expected where earnings and the balance sheet were concerned, OCSL could drop to $4.0 a share. Although the stock closed at $4.88, we’re sticking with our dismal number.
Otherwise there were a lot of dead cats bouncing during the week. The top upward movers were 3 BDCs who had reported poor to disastrous results and had previously been punished by Mr Market.
This week, ABDC (up 5.9%), CMFN (up 4.8%) and even TCAP (up 1.8%) had their moment on the podium as the top weekly gainers.
Overall,though, BDC earnings season has been a mixture of good and bad, with a weighting towards the latter.
Using a 4 week time frame (which encompasses the period in which essentially all the BDCs reported their numbers), we note that 26 of 46 saw their prices drop.
Ray Of Sunshine
The Good News that we’ve picked up from listening to/reading the transcript of BDC Conference Calls is that the borrower data which every BDC has points to (slowly) growing sales and EBITDA.
Yes, there are garden rakes for BDCs to step on, as credit issues increasingly pop up but a sizeable minority have managed to make their way three-quarters through the year without getting hit in the face.
All the BDC managers are complaining about competition for loans coming from every side, but each one also says they are being selective and careful.
From their lips to the market gods ears, we say.
However, when we pull out our crystal ball, we can’t noticing that only 14 BDCs are trading at prices over their 50 Day Moving Average. If we just count only those more than 1% ahead that number drops to 9.
Which means that 80% of BDCs are trading flat or down.
The numbers are similar using a 200 Day Moving Average hurdle.
We may not be on the edge of the precipice thanks to our Energizer Bunny economy, but barring an unexpected catalyst, the BDC Reporter’s instinct is that we are more likely to go down than up in the weeks ahead.
Even when tax loss selling gets finished.
BDC FIXED INCOME
Dull. In A Good Way.
Using the median price of the 35 public BDC fixed income issues we track, we can safely report that watching paint drying would be more exciting than tracking the moves of BDC Fixed Income.
For the week, the median price was $25.48. The week before: $25.40. The week before that $25.47. And $25.40 the week before that.
Last week, we had noted – with bated breath – that the number of BDC Fixed Income issues trading at $26.00 or higher had dropped to 2 (from 3 or 4).
Guess what ? The number this week was 5 (including 2 exactly on $26.00).
At the bottom of the table, we still have the same 2 BDCs trading below $25.00 par: MFINL and CPTAG.
MFINL traded at $24.90. We wonder if the Baby Bond will trade back at par before we drop the Baby Bond from our coverage in a few weeks when Medallion Financial shareholders vote to cease to be a BDC ?
The chances look good.
CPTAG closed at $24.80, but having recently gone ex-dividend, we expect even that Convertible issue to crawl over par before long.
Time To Go
In terms of BDC Fixed Income News You Can Use, there was only the anticipated announcement from MVC of its redemption of MVCB, now set for December 21.
Sound Of Silence
What we didn’t hear about was any stated intention by Oaktree to redeem OCSL’s Baby Bond with the ticker OSLE, even though the Indenture has allowed just that since October.
However Oaktree- from what we’ve seen so far – likes to keep its cards close to its vest.
Shortly after its Conference Call – but never mentioned when talking to the analysts on the CC – OCSL arranged a new Revolver facility, presumably to replace its Fifth Street inherited financing with ING.
Maybe Baby Bond holders of OSLE will wake in the coming week(s) to a similar announcement ?
The market seems to agree with OSLE trading at $25.22.
Coming Soon ?
Nonetheless, the BDC Reporter has high hopes for new Fixed Income issuances in the weeks ahead, even if the yields on offer might be miserably low.
A factor that may cause some BDCs to tap the public debt market is the recent stinginess of the SBA.
After handing out SBIC licenses like cookies at Christmas for many quarters, the SBA has gone suddenly quiet.
BDCs with existing licenses seem to be able to draw down committed debentures but new licenses are a different matter. ( A fascinating subject for another time).
Should that continue, some BDCs – drawn by the incredibly good terms on offer – might tap the public and private Unsecured Note markets with greater effort.
With the flattest yield curve imaginable and investors in a giving mood, most BDCs should be able to borrow on an unsecured basis on terms equal or even better than what’s on offer on a secured basis from banks, once all the costs are figured in.
Even a premium would be worth the incremental expense to avoid depending on fickle banks if conditions should worsen in the years ahead.Already a Member? Log In
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