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BDC Market Recap: Week Ended January 5, 2018

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COMMON STOCKS

Beginning

First day back – and first business day of 2018 – BDC prices were lighting up like a Christmas tree.

At one point, when the BDC Reporter scanned the 46 public BDCs we track, every single one was up in price and in the green.

Except for CGBD, which had shot up in late 2017 and was returning to earth.  See the December 30, 2017 Market Recap.

Out Of The Blocks

Using the UBS Exchange Traded Note with the ticker BDCS as our guide, given that its index covers most of the BDCs on our list, the sector began at $20.76.

The high on the first day was $20.94.

Would we be off to the races and would the BDC Sector – dropping in price for exactly 9 months – start heading higher ?

However, by week’s end we had our preliminary answer : probably not.

BDCS ended the week just one cent up at $20.77.

No Consensus

On the week, there were 28 BDCs up in price, but there were also 18 down or unchanged.

As was the case at the end of 2017, many more BDCs price was beneath their 50 Day Moving Average than ahead: 35.

Using the 200 Day Moving Average metric the picture is even a little bleaker with only 8 ahead of that longer time frame.

Down

Two BDCs dropped more than 3% on the week  – the BDC Reporter’s tripwire for further discussion: the previously mentioned CGBD (7.9%) and SCM (4.5%).

Why SCM fell out of bed is anybody’s guess. We checked their website just in case we’d missed some key news item or filing but found nothing new.

New Low

Furthermore – as we reported during the week as part of our occasional Stock Watch feature –  at least 3 BDCs hit new 52 Week ( or longer) lows.

What was disconcerting to the BDC Reporter is that all three were amongst the best performers in 2017, and for many years before that.

The BDCs in question for those who did not read the article were : GBDC, FDUS and TCPC.

Good News

To be fair, though, there were a number of bright spots during this first week as half the country shivered in the cold.

5 BDCs were up more than 3%, as this snapshot from Seeking Alpha‘s data records shows:

One By One

MFIN is swinging up and down as investors bet on a recovery. Next week could go either way.

Thanks to the change in Investment Advisor – and the problems of changing horses in mid-stream – FSIC remains a volatile choice. Even with a 4.8% increase, FSIC is still only 5% off its 52 Week Low.

HCAP suddenly suffered a crisis of investor confidence back in October, with the price dropping from $13.80 on October 17 to $10.67 within 6 weeks.  At $11.37, HCAP remains closer to its floor than its ceiling.

Over at GECC the price drop in 2017 occurred when the Investment Advisor – and associated funds – began selling a portion of their common stock holdings. The price dropped (17%) to $9.28 a share.

Given what’s happening over at major investments Avanti Communications and Optima Steel, we wonder if this week’s enthusiasm for the stock will last.

Avanti is about to undertake a debt for equity swap which might greatly reduce the large amount of (non-cash) income previously being booked by GECC, after the satellite company reported very poor results.

Optima Steel was going to be rescued from Chapter 11 by its prior owners with a $200mn equity infusion. That’s fallen apart and now we’re looking at a unsecured debt for equity swap. Implications for the senior secured lenders – including GECC – are unclear.

Where ACSF is concerned, there’s been no news. We did notice when doing our homework and visiting their website that a “site under construction” message pops up when we sought to view their SEC filings. Curious.

Wrapping Up

Maybe it was the cold, or maybe that skeptical investor sentiment about most things BDC that has been in the air for months but 2018 began with more than a whimper than a bang.

There’s still time for the “January effect” to kick in.

Looking back at 2017, twice during the year since the BDC rally topped out in March, BDCS has risen by 3% or more before resuming its downward path.

A third iteration is possible in the weeks ahead.

Down The Road

The BDC Reporter, though, does not yet see any catalyst for a long term price revival.

This was our 2018 projection last week for those readers who might have been too busy enjoying the break to read our auguries:

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.

With one week gone and only 51 to go, we’re sticking with that view.


FIXED INCOME

Sitting Pretty

The median price for the 34 remaining public BDC Fixed Income issues we track was $25.54.

That was up marginally from $25.45 the week before, but remains in the narrow channel that has existed since the spring of 2016.

There were two issues trading over $26.00 and one below $25.00 (Capitala‘s Convertible Debt with the ticker CPTAG).

No News 

There was no news about individual Fixed Income issues in the shortened week.

However, the BDC Reporter has no doubt there is much rocking and rolling ahead.

Long List

Premium subscribers who navigated to our Fixed Income Table during the week past will have seen our latest assessments about which BDC issues are eligible to be redeemed in 2018 and what the chances are that might happen.

Admittedly, we take a conservative view of the odds but there is no denying that there are 19 BDC Fixed Income issues which COULD be repaid.

Roughly half are left overs from 2017- or before that – which did not get their trigger pulled last year and half are 2018 vintages whose non-prepayment period is up.

Trends

With some BDCs shrinking their balance sheets and not requiring as much debt; others seeking to reduce interest expense to maintain earnings and distributions and with a still very issue friendly market, we’re not optimistic for existing Unsecured Notes.

By no means is our record pristine, but the BDC Reporter believes the odds of redemption are HIGH for 16 eligible debt issues and MEDIUM for the 3 others.

A Shame

If that should occur any existing Note Holders who bought at a premium to par – and many did – will be facing both the loss of debt typically yielding north of 6.0% and a less-than-full repayment of their capital.

The market has already adjusted – in part – to this possibility.

We count 9 of the 19 issues eligible for early redemption trading at $25.50 or below at week’s end.

Central

The Big Question is whether BDCs  will continue to pump out new issues to offset called in issues.

Last year, the universe of publicly traded Unsecured Notes shrank from 38 to 34.

There’s a danger – just looking at the numbers of issues that could be called this year – that 2018 might result in a much smaller pool of available investments.

Optimist

However, the BDC Reporter remains relatively optimistic that the BDC “Baby Bond” phenomenon will not begin fading away in 2018.

Above all else, this type of debt financing has the benefit of being very issuer friendly, with essentially no covenants and a term that matches the assets the BDCs own.

Moreover, the narrowing yield curve and unremitting investor enthusiasm has meant the cost of borrowing has come markedly down and is competitive even with secured debt.

As it’s no mystery that we are well along in the economic cycle and bank lenders are notoriously unreliable when market conditions deteriorate, BDC CFOs everywhere must be looking favorably at the Baby Bond structure.

(We’re surprised no non-traded BDCs have come to market).

At Risk

The greatest risk to the public BDC fixed income sector – which has only been around since 2012 – is from competing institutional investors.

As we’ve seen through 2017,  a number of new Unsecured Note issues were placed directly with institutions, and are not available to be traded in the public market.

So far the institutions have focused their energies on the better known, larger issuers.

Should the institutional investor base start moving downstream, new issues might get raised but never come to the public market.

We’ll Be Here

We shall have to wait and see.

The BDC Reporter will continue to be the only financial publication which regularly covers such subjects.

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