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BDC Market Recap: Week Ended January 19, 2018

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COMMON STOCKS

Don’t Shoot The Messenger

From the correspondence we’ve been receiving from readers, we get the notion that the BDC Reporter is regarded as being “down” on the BDC sector.

That’s bitterly amusing given we are almost exclusively invested in public BDC securities,  which was the genesis of the BDC Reporter.

As we explained to one reader, we’re mostly reporting on these pages what we’ve been observing, without fear or favor:

As we discuss every week in the Market Recap articles, the sector has lost (15%) since the high on March 31, 2017. Moreover, there are an increasing number of BDC stocks trading off, some at All Time Lows.

Latest

We wish we had better news to report, but our latest glance at the Wells Fargo BDC Index shows negative returns for 1 month, 3 month, 4 month and 12 months.

When we looked at how many BDC prices at the end of this week were trading above their 200 Day Moving Average, we counted only 8. Out of 46.

Only 13 of 46 are currently trading at prices above those of 52 weeks ago. Which means that 3 out of 4 BDCs – on a price basis – are disappointing their medium term holders.

When we look at our own database, we find 14 BDCs trading within 5% of their 52 Week Lows, and 13 between 5%-10%. That’s 27 in the dumps versus just 4 BDCs within 5% of their 52 Week Highs.

Only 12 BDCs are trading above their book value and 34 below.

A New Low

On the 16 of January, BDCS – shortly after paying out its latest distribution – dropped to a new low at the close of $20.29. (Closed the week at $20.42).

A year ago – at exactly the same point – the closing price was $22.70, or 12% higher.

Clueless

Nor were there too many incipient signs of a change in direction, despite a flurry of activity at the end of last week.

A few BDCs have moved out of the 0-5% 52 Week Low category (as many as 5) but that’s about all.

Renowned BDC names like ARCC are trading in this group,  mostly at a discount to book.

This week – as we noted in the Daily News Table in almost real-time – NMFC joined the club, hitting a new 52 Week Low.

Everybody’s favorite BDC – MAIN – announced a higher distribution level going forward and stellar IVQ 2017 preliminary results- and was greeted with a lower 5 Day price:

Big Picture

The BDC Sector Correction – when prices drop more than 10% – began in August 2017 and has now been underway for nearly 6 months.

Looking forward – as we explained to our readers – the BDC Reporter’s analysis does not suggest much reason for a change in sentiment.

We don’t come to these conclusions willy nilly or based on a “gut feeling” but based on undertaking BDC-by-BDC analysis.

46 Crystal Balls

We offered to our readers the Dividend Outlook for every BDC as an attempt to quantify future prospects.

With the obvious caveat that nobody can really know what’s coming down the pike, the potential picture remains very mixed.

On the one hand, 25 BDCs we expect to maintain or increase their distributions.

That still leaves 21 BDCs at varying degrees of risk of being payout reducers in the year ahead.

(Judging by the yields on BDC stocks, our view is not that different than the market).

At the end of the day, BDC prices are based on discounted cash flows, and those cash flows appear to be at risk of being lower this time next year.

(As we all know, dividend decreases tend to be much higher than dividend increases. Last year only 5 BDCs raised their payouts, and usually by very modest percentages).

Be Very Careful.

For BDC investors with short and medium term outlooks the lesson here is to be very selective. In the past 52 weeks only 5 BDCs have increased in price by 10% or more.

16 have dropped by 10% or more.

Buy And Hold ?

Longer term investors have more favorable metrics to console themselves with.

24 BDCs have maintained or increased their distributions for at least 8 quarters in a row and 14 of those have being going strong for 5 years or more.

For what it’s worth the BDC Reporter has AT RISK or DECREASE projections for 2018 for only 3 of the 24 BDCs with good dividend streaks. 

With prices mostly coming down – and by choosing BDCs most likely to maintain/improve their payouts –  long term investors have an opportunity to profit even in the face of – or because of – a sector in slump mode.

Stock picking has never been more important, but so has patience.


FIXED INCOME

Not Same Old Same Old

The median price for the 34 BDC Fixed Income issues we track was almost unchanged this week: $25.46 versus $25.43 last week.

Last year at this time the median price was $25.51.

Of course, there were 37 public fixed income issues in the market last year.

Little Things Add Up

The above notwithstanding, the BDC Reporter can’t help noticing – as we mentioned last week – a subtle shift downwards.

We have the suspicion that concerns about higher rates – with the 10 Year Treasury at a multi-year high – are percolating into this segment.

We don’t have much in way of evidence except that only 1 issue for a second week in a row is trading above $26.00

Typically, there have been 3-4 issues above the magical $26.00 threshold.

Plus there are 3 fixed income issues below $25.00 (CPTAG,CPTAL and OCSLL). We’re used to have zero to one issue in this category.

Rate Risk

As an exercise, we charted the price of 6 of the longest dated BDC issues out there – see below – and found 5 of the 6 were down in price over the past month. (Only PSEC’s PBB was an aberration).

That’s a very different picture than the 12 month chart, where 4 are up and 2 are down.

Erosion

Then there’s the relentless redemption of existing Baby Bond issues by cost saving BDCs.

(At least 8 were fully paid off last year).

This week HTGC issued  new institutionally focused Unsecured Notes with a coupon of 4.625% to repay the remaining amounts on HTGX, whose coupon was 6.25%.

Shortly we’ll remove HTGX – already partly redeemed in October 2017 – from the world famous Fixed Income Table.

(The new GECC Baby Bond with the promised ticker GECCM remains in the “grey market”. We may add this second Baby Bond by GECC next week).

In Other News…

Also on the week TSLX issued a new round of institutionally-focused Unsecured Notes with a 5 year maturity (the investor sweet spot) with a coupon of 4.5%.

The proceeds will initially pay down the underutilized Revolver, but also locks in a good rate in advance of a 2019 maturity of other unsecured debt at the BDC behemoth.

S&P gave the new Notes an investment grade BBB- rating, as discussed in the Daily News Table.

While S&P was praising TSLX,  a less favorable commentary accompanied the rating agency’s reduction in FSIC‘s rating of its existing unsecured debt.

Still, S&P only dropped FSIC’s debt to BBB-, the same as TSLX.

Nonetheless, a downgrade of this sort for FSIC is no small matter and places at risk its investment grade status at a critical hand-off time when GSO Blackstone is packing its bags and KKR is moving in.

We should say that S&P is giving a thumbs up to the change in Investment Advisor:

On the other hand, we maintain a favorable view of the 
external adviser's announcement that it will form a partnership with an 
affiliate of KKR & Co. to jointly manage the four non-energy FS Investments 
business development companies (BDCs) and the two Corporate Capital Trust BDCs 
(previously sub-advised by KKR).

Another View

The BDC Reporter is less sanguine. We’re concerned about the handover of highly complex transactions from one set of bankers to another, many of which have been restructured after stumbling in the GSO Years.

The departing Investment Advisor liked to control the debt tranches in which they were involved. We wonder how much of the “secret sauce” in GSO’s structuring approach will be appreciated by KKR ?

Time will tell, but KKR could shortly be talking on Conference Calls about “legacy assets”, always a sign of a lender trying to distance itself from the problems in its portfolio.

Short Term Outlook

No new BDC issues are coming up for early redemption for several more weeks.

However, there are still 9 issues that have passed their “Don’t Redeem” date and could be called at any moment.

Of those 7 we have estimated that the risk of redemption is HIGH. Only TCCA and KAP appear a little less likely to be repaid right now. KCAP needs the capital to grow earnings and TCAP has bigger fish to fry.

With these dual pressures underway, we expect BDC Fixed Income prices to remain generally under pressure for some time to come.

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