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BDC Common Stocks Market Recap: Week Ended February 2, 2018

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Note that we’ve decided to split the Market Recap into two: BDC common stocks and BDC Fixed Income. Everything else remains the same.

BDC COMMON STOCKS

Not Good

We will begin with an understatement.

This was not a good week to be a BDC common stock investor.

As Johnny Carson would ask : “How bad was it “?

The sector tracking Exchange Traded Note with the ticker BDCS dropped to $19.70 from $20.40 the week before.

At $19.70 BDCS is at yet another New Low.

All Week Affair

Much of that drop came on the last day of the week, but the slump was in before that.

In our daily updates to readers we noted a couple of times before Friday that BDCS was at a 52 Week Low.

Remarkably, according to Seeking Alpha data, every single BDC out there that we cover was down in price on the week.

Every single one.

Moreover, 22 BDCs dropped by 3% or more on the week.

That’s as many as we can remember since beginning the BDC Market Recap over two years ago.

Red Ink Was On The Wall

Nor has this slump occurred out of the blue.

The BDC Sector has been headed downwards for weeks, or months- depending how you measure such things.

Last week there were already 27 BDCs trading within 10% of their 52 Week Lows.

Now there are 32.

Last week, we had 4 BDCs toughing it out within 5% of their 52 Week High.

This week, we are down to one.

Don’t Look Now

Looking back a little further – over a 4 week period – is hardly more encouraging.

Only 9 BDCs eked out a gain price over the longer period.

Even a 52 Week look-back is depressing.

Only 8 BDCs are up in price over a year period  and 38 are down.

It’s hard to pick the right stocks when anywhere from 80% to 100% are down in price.

Context Is Everything

As we’ve been reporting week in and out investors have been taking money off the table since March 2017.

Then we’ve had the recent jitters in the broader markets, which had been moving up even when the BDC rally faded.

Finally, there’s Earnings Season right around the corner.

Looks like many investors decided to take a Better Safe Than Sorry approach and move to the sidelines or take whatever profits are left from the February 2016-March 2017 Incredible BDC Rally.

We’ve been warning  for months that our projections for mediocre BDC earnings and distributions in 2018 suggested prices were overblown and a correction was possible.

On The Other Hand…

Now as the pendulum swings in the direction we suggested, let us make the contrarian argument.

Nothing is written in stone..

Now that actual results will come out, we’ll see how the better and weaker players have navigated the last 3 months.

If we get a few early reassuring results, the BDC fever might break.

We wouldn’t be surprised to see a robust bounce back in the weeks ahead.

Market sentiment – which has become jumpy and worried about both troubled and untroubled BDCs alike – might settle down.

There’s an element of “Show Me” in investors approach right now.

BDCs that report good results might calm investors anxieties.

You Know What Keynes Said About The Long Term

Longer term, though, the BDC Sector will continue to face the headwinds of higher borrowing costs; potentially higher credit losses; spread compression due to new entrants coming in from all sides; weaker deal structures and difficulty raising new equity with so many funds trading below book (37 of 46).

On the other hand, there are a few bright spots. Higher LIBOR rates will offset some of the impact of spread compression; an expanding economy and all that capital looking for a home will keep credit losses under control; the turnaround in energy prices will help those BDCs who held on to their 2014-2016 portfolio losers and apparent unbridled access to the unsecured debt markets, regardless of prior performance.

Equity Gains

Also many BDCs with equity stakes in portfolio investments are benefiting from the hothouse atmosphere in buy-outs that they have contributed to as lenders.

BDCs – too – will be taking chips off their tables, sometimes pro-actively and most of the time as their sponsors cash in their companies – with the BDCs equity stake going along for the ride.

Just look at the multiple gains announced early by Fidus Investment (FDUS) and a decent gain booked at Capitala (CPTA) and successes mentioned by Hercules Capital (HTGC) and Horizon Technology Finance (HRZN) as well as by Main Street Capital (MAIN).

Final Thought

For BDC investors this was the Worst of Weeks. However, for PROSPECTIVE BDC investors with cash in their pockets this might have been an early dawn.

For what it’s worth, the BDC Reporter’s internal long term valuation of the 46 BDCs we track – which involves projecting out distributions for the next 5 years and estimating a 2023 terminal value – shows 12 names that could earn an average annual Total Return of 10% or more over the next half decade.

That’s as high as we’ve seen since we began a systematic valuation process several months ago.

Silver lining ?

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