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BDC Market Recap: Week Ended December 29, 2017

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COMMON STOCKS

Finished

From the perspective of BDC common stock investors, the week – and the year – ended with a whimper.

The UBS Exchange Traded Note with the ticker BDCS – which we’ve used from the outset as our thermometer for the sector – ended at $20.76.

That’s down from $20.93 the week before and $21.00 the week before that.

Weak 

Only 10 of the 46 stocks we track were up on the week  (and only 12 over the last 4 weeks), and 35 were down in price.

A similar metric which measures the number of BDCs whose price is over their 50 Day Moving Average indicated only 11 names, and 10 over the 200 Day Moving Average.

We’ve developed our own datasets – which update constantly through the market day – and one of those is how many BDCs are within 5% of their 52 Week Low.

We counted 20 names on December 29 and another 4 between 5%-10% of the bottom.

Better

It was not all gloom.

We also keep track of how many BDCs are within 5% of their 52 Week Highs. We counted 7, and 8 in 5%-10% category.

Worth noting this week is how CGBD – which had been slumping drastically through December 11 – suddenly turned around and has moved 15% from Low to Close.

The only other BDC which moved up more than 3% on the week was GECC, boosted by the announcement of a juicy Special Distribution. Investors don’t care that much of the income comes from non-cash sources.

More Down Than Up

However, there were 5 BDCs with a greater than (3%) drop in the week as well.

Doubts – or profit taking – affected MFIN, which was off (10.2%).

Something’s Happening Here. Or Is It ?

Intriguingly PSEC was off (7.2%) despite the largest insider purchases of a BDC’s stock we’ve seen in a short period in the sector’s history.

Despite CEO John Barry – and others – spending about $200mn on purchasing PSEC stock since November, the stock price still dropped- even over a 4 week time frame.

Mr Barry nows owns – according to a just filed disclosure – 52,358,273 shares or 15% of all PSEC shares outstanding.

Despite that very tangible – to some – sign of optimism about this huge but controversial BDC, the stock price slumped back in the end of December to the level at the beginning of the month.

We have a feeling the PSEC story may take some interesting new turns in 2018.

Here Too 

Also down was ABDC (3.7%) after paying out its dividend. However, a new major shareholder and potential activist has arrived on the scene : Joseph Stilwell and funds associated with Stilwell Value.

See the 13D Filing from December 28, 2017.

This is another major story brewing for 2018. Readers should also have a look at the BDC Reporter’s recently published Year In Review for ABDC.

(We owe a shout out to a reader/subscriber for bringing the 13D Filing to our attention before we had noticed what is – possibly – a major development).

Miscellany

Also down by more than (3%) were MCC and CPTA, two BDCs which investors cannot help worrying about, and with good reason if you’ve been reading the BDC Reporter.

Year In Review

Given we are writing this on December 30, with no more trading days ended in 2017, we can’t help summing  up the year as well.

As we’ve been discussing in these one week increments all year, the BDC Sector started strong and remained in an upward trend throughout and inclusive of the last day of the first quarter.

BDCS was at $22.69 at the end of December 2016 and ended March 31 at $23.79 and picked up a $0.44 distribution along the way.

We couldn’t help having a look at what we wrote at the time.

It’s clear the mood was much more optimistic than how the year has just ended. For example: 36 of 45 BDCs were priced above their 200 Day Moving Average.

Also, 34 BDCs were within 10% of their 52 Week Highs.

As we’ve said before this is as much a matter of that hard to define and impossible to bottle “market sentiment”.  We even addressed the enthusiasm in the air in our Market Recap at what proved to be the apex of BDC popularity:

Simply put, the BDC rally remains alive and well.

A BDC can cut its dividend, be loaded up with under-performing loans, max out its balance sheet, change its CEO in midstream and still see its stock price rise.

Kill-joys like the BDC Reporter and the credit rating agencies can point to growing credit problems in a series of industries and…nothing.

This week sub-prime auto lending was in focus, but then there’s Retail, Health Care, Restaurants and Energy.

Loan spreads can eat away 10-15% of a lender’s yield for equivalent risk (even more to the bottom line) and nobody blinks.

LBO activity-the bread and butter of leveraged lending-can slump, forcing an ever growing number of lenders to compete over a dwindling number of new deals and investors shrug.

The more this goes on, the more extreme the likely adjustment to the downside.

Until then, Let the Good Times Roll.

Roll On

Notwithstanding a short lived pull-back in April, by May 2 BDCS was almost at its March 31 level or $23.69.

In fact, the BDC Sector – on a Total Return basis – was keeping up with the booming stock market levels in general as this December 2016 to May 2 2017 chart shows:

Mood Swing

Then – without any trumpet blast – the investor mood changed.

From May 2, the BDC Sector has been in perpetual descent.

By mid-May BDCS had dropped to $22.25 and remained in a narrow range through the early summer, but the bloom was clearly off the rose.

On August 4, BDCS was over (7%) below the March 31 highest high. (The major market indices, by contrast, continued in their upward trajectory).

The BDC Reporter was not unaware of the phenomenon as the data points we track were pretty clear:

Also notable – but not yet conclusive – the number of BDCs trading above their 50 Day Moving Average dropped.

From 27 to 19 on a universe of 46 names.

The number of BDCs trading above their 200 Day Moving Average was just 7, down from 17.

There was also slippage in the number of BDCs trading within 10% of their 52 Week High to 20 from 23.

On the other end of the 52 Week Table, 11 names were within 10% of their 52 Week Lows versus 8 last week.

We brought out our crystal ball – as we do on occasion – and while hardly ringing the alarm bells, we did say:

We still expect the next major move for the BDC sector will be a leg down rather than a leg up unless new legislation in Congress causes a new surge in BDC enthusiasm.

Swinging Low

The U.S. Government was otherwise engaged in the weeks that followed and the BDC sector continued to slide through September 11, reaching a closing low of $21.12.

That pushed BDCS into “Correction Mode” as the price was now more than (10% ) below the March 31 high: (10.8%) to be precise.

Expect The Unexpected

This was followed by one of those head fake periods when stock prices rally for a short time only to slump back.

Even at the time, the BDC Reporter was not convinced that the uptick in prices that began September 12 would last.

This is what we wrote September 15th, as BDCS enjoyed the beginning of its Indian Summer:

Judging by the price of BDCS alone, the BDC Sector seemed to edge ever so slightly up.

BDCS ended at $21.27, up from $21.20 the week before.

That was the lowest reading on our weekly recaps in 2017.

(The lowest intra-day price we’ve found was $20.99 on September 1st).

However, as we suspect you already know, it’s far too early to break out the party hats and the champagne. (We do look for any excuse).

The trends across the data suggest continuing downward pressure, or – at best – a pause in the deflating BDC Sector balloon….

Unfortunately for BDC investors with capital to spend, by the BDC Reporter’s numbers, this only brings BDC prices from the Very Expensive/What Were They Thinking level down to Expensive/Pray Everything Breaks In The Right Direction level.

Gone With (The Autumn) Wind

By early October BDCS had bounced up as high as $22.07, but with the dividend pay-out we were back at the September low levels by October 25.

The BDC price revival had lasted only 6 weeks and  took us out of Correction Mode only briefly.

We were not fooled by the market’s short lived revival. Back on October 7, we threw cold water on the subject:

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.

In fact, between October 4 and November 2 (the unofficial beginning of IIIQ 2017 earnings season), BDCS dropped (7.7%) to $20.43 ($20.26 intra-day) , its lowest level of the year.

In retrospect, Mr Market – not unreasonably – was hedging bets ahead of the flood of results.

This is what we said at the time:

From it’s highest high on March 31, 2017, BDCS has dropped (13.5%), as of Friday’s close.

To place all this into a bigger context, the BDC Sector has given up half the gains of the Great Rally that began February 2016, peaked March 31 2017 and petered out in early August 2017 with a 10% move downward.

For months – notwithstanding a brief bounce in most of September –  the BDC Sector has been headed down.

Final Leg

Nobody would say that the quarterly results – taken as a whole – were great, but they were not as poor as some expected.

In the last few weeks of the year – and as each BDC reported in turn – the sector rose as much as 4.1%. However, the last few weeks saw two-thirds of that increase melt away.

Back At The Beginning

Which brings us back to where we started and highlights the Not So Good Year the BDC Sector endured.

Just taking BDCS, the price drop was ($1.93) on the year offset by ($1.83) in distributions, for a very modest negative Total Return.

Your Results May Vary

Of course, most investors don’t just Buy The Sector but individual stocks in some combination so remembrances of 2017 will vary for everyone.

The data shows that 17 BDCs dropped (10%) or more in price, and presumably generated Total Return Losses. 8 of those were the Biggest Losers, with a 52 Week price drop of (15%) or more.

Top 3 Losers were TCAP (48%), CPTA (44%) and OHAI (34%).

On the flip side, 14 BDCs saw their stock price increase in 2017 and (with the exception of MFIN) also paid out distributions.

The Big 3 were GAIN, MVC and MFIN.

Then there’s a group of 15 BDCs whose stock price dropped less than (10%) but paid out distributions (which average just short of 10% on the year) which involve neither cheers or jeers.

Characterizations

In retrospect 2017 was a mixed nuts kind of year with its initial upsurge; long plateau period and post-summer decline and with as almost an equal number of individual Winners, Losers and Meh stocks.

At this stage the BDC Sector is in a kind of stock market purgatory: neither in a Bull Run nor in the throes of a Major Correction.

Next ?

Other commentators are bullish about the beginning of the year. They point to a bounce back from recent “tax loss selling”; the impact of higher LIBOR on results, etc.

The BDC Reporter does not want to play that short term guessing game because the markets endlessly surprise us after all these years (remember CGBD at the top of this article) in their short term enthusiasms.

And dislikes. See what’s happening to the FDUS stock price since April. Is that double digit drop in price market prescience or investor jitters ?

Our View

What we have done is look down the list of the 46 names that we’ve covered every step of the way all year and asked ourselves how many seem to be headed in a positive direction and how many not in terms of fundamentals.

We count 24 in the thumbs up category and 22 thumbs down. 

Hardly the ingredients for a Major Rally or Worst Year Ever.

More likely – barring an unexpected Recession or War with X or Some Sort Of Financial Crisis – the BDC Sector is most likely – in our humble opinion – to continue to shift downwards in fits and starts. 

This time next year will BDCS be below $19.00 – a price that would obviate any dividends received on a Total Return basis ? We think so.

Context

That would still be higher than the $18.47 price at the BDCS All Time Low in February 2016 when investors thought all the markets were headed for a fall, but hardly anything to look forward to.

Till then, we may get some short term upward boosts in the year ahead.

In the long run, though, prices and fundamentals synchronize.

Choice

As was the case in 2017 which BDCs you’ve invested – and just as importantly – which you’ve avoided are likely to determine if 2018 will be a Good Year or not.

Just Buying The Sector may not be enough.


FIXED INCOME

We’ll hold off a full year review till next week to keep this article from being even longer than it is. We will just focus on the week’s developments in BDC Fixed Income:

End As We Began

As has been the case all year, the median price of the now 34 BDC Fixed Income issues we track was $25.45. That’s down from the prior week but remains within a fraction of 1% of the range achieved in the past many weeks.

Likewise, there were 3 issues trading above $26.00 a share and just one that closed beneath $25.00.

That was CPTA’s Convertible CPTAG, which closed at $24.85.

Huge Change

Remarkably Medallion Financial‘s MFINL Baby Bond – thanks to the highest coupon in the BDC space and investor enthusiasm about the future – traded up to $26.83.

That made the former Worst Performer, the numero uno issue of the week in price terms !

News

The only news in the week was that CSWC – in an expected move – announced issuing additional Unsecured Notes to its underwriters following the successful raising of $50mn from the public debt market. Ticker: CSWCL.

Readers will not be surprised to hear that investor demand for virtually any kind of tradeable BDC debt remains high.

Exhibit Number 1 is the current price of the new CSWCL Notes, trading just north of $26.00 a share.

Next Week

We’ll look both backwards at a relatively uneventful year in BDC Fixed Income and ahead to 2018 where any number of scenarios are possible.

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