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BDC Market Recap: Week Ended December 15, 2017

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COMMON STOCK

Fake Out

Don’t be fooled.

Although the UBS Exchange Traded Note with the ticker BDCS – which we use as a measuring stick – was up from $20.94 last week to $21.00 on Friday December 15, 2017, the underlying trends are otherwise poor.

We counted 28 BDCs down in price on the week versus 18 up.

Over a 4 week period, the number of BDC prices that were down was 29.

When we count the number of BDCs trading above their 50 and 200 Day Moving Averages we find only 13 and 11 respectively.

That suggests about three-quarters of BDCs are coming to the end of the year on a downward tilt.

Bottom Up

When we look at our own data table that we’ve been developing of late, we note that 18 BDCs out of the 46 we track are trading within 5% of their 52 Week Lows.

Last week, the same metric saw 17 BDCs in that position. During the recent BDC Bull run (time to read our archives) which peaked in March 2017, we were hard pressed to identify  two or three BDCs in the bottom of the basement.

Anyone who has  been reading the BDC Reporter and our Stock Watch feature through the week will know we’ve called out 5 BDCs which have reached some new record low.

Usual And Unusual Suspects

Disturbingly, these Biggest Losers include not only the names you might expect after reporting poor results (BKCC,CMFN, MCC) but also some good performers, which have been – till very recently – investor favorites.

The 2 in question breaking new barriers on the downside are newbie CGBD and TCPC.

Other fallen favorites include ARCC, NMFC and FDUS  ( 3% off their 52 Week Low price) , GSBD (4% off) and SLRC (1% off).

Even FSIC, with a shiny new co-Investment Advisor in KKR – as we discussed at length in the BDC Reporter – is only 3% off its 52 Week and All Time Low since going public.

Still, many of the better performing BDCs from a results point of view remain priced at or above book value, which you cannot say for the under-performers who trade at discounts to book of 18-35%.

Rays

Offsetting the growing gloom are a few BDC shooting stars, a bright reminder that there is an exception to everything.

The most salient example is soon-to-ditch-BDC status MFIN, which was up 45% on the week and which was on our Special Situation list for just this reason.

The market appears to have been convinced – at long last – that the failed taxi medallion lender might yet survive as a consumer lending bank.

Also suddenly shooting up in price – with no obvious catalyst – has been NEWT. Worries created by the FBI barging into a subsidiary’s offices and carrying away files have given way to unbridled enthusiasm.

NEWT was up 16.5% between a low on November 3 and the highest point on December 13, but did slump back at week end to a 15.2% overall run-up.

The other Biggest Winner – up 15.4% on the week (with most of that surge in the last couple of days- is tiny OHAI, sparked by question marks about its future and trading well below book.

However, these high flying stocks should not deflect us from apprising the Big Picture which remains mostly dismal, as we described above.

Everything Happens For A Reason

Looking forward – and having completed updating our Dividend Outlook for 2018 of all 46 BDCs we track – Mr Market’s skepticism does not seem unwarranted.

We may be right or we may be wrong – as we’ll be seeing in the year ahead – but we estimate that 19 BDCs are likely to, or at risk of, cutting their payouts.

That’s 4/10ths of the public BDC universe in the midst of an economy reportedly with a 3% growing GDP; leveraged loan losses at historic lows and most BDC Conference Calls leading off with promises of managers being highly credit selective; moving up the balance sheet; and promising their commitment to maintaining the distribution come what may.

On the other hand, the future is unknowable and with a higher LIBOR rate in 2018 (although that does cut both ways); more fee concessions (the Big Trend in the last quarter) and some good fortune where credit is concerned, the BDC Sector may perform better than those raw numbers and the (13%) pullback in the stock price of BDCS since March 2017, might suggest.


FIXED INCOME

Drop

Using the median of the 35 BDC Fixed Income issues we track, this segment dropped by (0.6%) in price last week.

The median went from $25.49 to $25.34.

However, that may have much to do as the fact that numerous issues have just gone ex-dividend for the quarter and have dropped in price temporarily.

More Or Less 

Most of the other metrics we look at from week to week have not altered much.

There are two issues treading at $26.00 or higher, versus three last week.

Only 1 BDC issue is trading below par.

Revival

No, it’s not MFINL – which due to market optimism about MFIN’s future – has made the long climb back above par.

At its lowest point MFINL was at $13.72, but closed this week at $25.07 and has traded as high at $25.25.

From lowest to highest, that’s a remarkable 84% appreciation in price, not to mention all the interest income collected along the way.

This has been a matter of Who Dares Wins – the motto of the British Special Air Services – and represents the only truly (formerly) “distressed” BDC Fixed Income issue out there in the 5 years since this corner of the BDC market has existed.

All Alone

At the moment, the lowest priced Fixed Income issue is CPTA’s Convertible – CPTAG – which closed at $24.82, or just (0.7%) below par.

A Brief History Of BDC Fixed Income Distress

We’ve had “corrections” in BDC Fixed Income prices since 2012 – when the first flurry of Term Preferreds and Baby Bonds came to market – but only in some issues and for short periods and relatively modest dips (maxing out at 10%-15%).

What we don’t know – and can only find out the hard way – is what might happen to the BDC Fixed Income universe in the Next Recession.

Test Case

There is only one current issue which went through the Great Recession and that is AFC – which was originally issued by Allied Capital and  taken over by ARCC when the latter acquired the former.

The price chart for this singular example is not encouraging for Note Holders who want to sleep well at night, even through an economic storm.

As Allied’s fortunes soured, so did AFC’s over a two year period, dropping by up to (77%) in price. That’s an even greater percentage than MFINL.

However, once ARCC came along – and those dark forebodings about the collapse of our financial system dissipated, AFC moved back to par and beyond in a process which took over 3 years !

The AFC storyline may not tell us much about how BDC Fixed Income will fare next time Wall Street wobbles – given the much larger number of issues outstanding – but we offer up this time capsule as a reminder that all investing is difficult – even in Fixed Income.

Back To The Present

Speaking of more fixed income issues: This week another BDC launched its first Baby Bond issue.

As discussed on these pages and updated on the BDC Fixed Income Table, CSWC finalized a $50mn 2022 public offering, with a yield of 5.95%.

For an instant that will bring – when the new issue with the ticker CSWCL starts trading next week – the total number of publicly traded issues we track to 36 and the number of BDC issuers to 26.

Blink 

That’s going to drop almost immediately to 34 issues as both MVCB and SLRA will be fully redeemed in the days ahead.

We looked back at our own archives to see how much the number of choices available to investors has changed.

An early January 2017 article we wrote mentions 38 issues outstanding at the time.

So the BDC Fixed Income universe has shrunk – a little – over the year.

Still, we are far from being done.

We will pull out the BDC Reporter’s crystall ball and discuss 2018’s outlook in greater detail in the new year.

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