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BDC Fixed Income Market Recap: Week Ended February 2, 2018

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BDC FIXED INCOME

Unbreakable ?

The BDC Fixed Income market bent but did not break – as yet – under all the talk of higher rates and stock market collapse.

The median price of the fixed income issues we track dropped, but only marginally, to $25.33.

Not to say there is no pain in BDC Bond Land.

Where we used to have 3, 4 or even 5 issues trading above $26.00 a share, the week ended with only 1 (MSCA).

Moreover – only weeks after we crowed that no fixed income issue was trading below par- there are now 4.

Glass Half Full or Half Empty ?

However, none of the issues have dropped by 3% or more off par.

A chill may be going through the market but no panic selling as yet.

Look Out Below

Back in early 2016– which was the last time we had a Manic Market – investors dumped a number of issues.

Worst hit at that time were Baby Bonds and Preferreds held predominantely by individual investors.

Keep an eye out for what happens this time to Gladstone Investment’s (GAIN) 3 Term Preferreds; Gladstone Capital’s (GLAD) solo offering ; Prospect Capital’s only traded Baby Bond (PBB) and the values of smaller issuers like Great Elm Corporation (GECC) with two bonds and KCAP Financial (KCAP) also with two, to name a few.

Number 36

Shortly HTGX will be redeemed as promised by Hercules Capital (HTGC) when the technology BDC raised new debt capital recently.

Till that day, though, the universe of publicly traded Baby Bonds will continue to grow.

This week – as readers of the BDC News Of The Day and of the Fixed Income Table will know – Fidus Investment (FDUS) joined the party with a 2023 Baby Bond with a coupon of 5.875%.

Comparing And Contrasting

With the SBA becoming very particular about issuing new SBIC licenses many BDCs – like FDUS – must be looking to the medium term unsecured debt markets as a sensible (but still inferior) source of capital.

Even well priced Unsecured Notes cost a couple of percentage points more than the all-in cost of SBIC debt and the SBA debt is typically twice as long in length.

Nonetheless, with the 10 Year Treasury rising (which is what SBIC debentures are priced off) and the Unsecured Notes markets very welcoming we may see a slew of new debt issues,

What is unclear, though, is whether those offerings will be targeted at retail investors in the form of Baby Bonds or placed with yield hungry institutional or foreign investors.

Outlook

Don’t quote this back to us in a few months, but we expect to see the BDC Fixed Income sector – from a price standpoint – to continue to weather the impact of higher rates and of all investors – in both stocks and bonds – anxiously worrying whether the party is over.

Helping matters is that most BDC Fixed Income issues remain short or medium term; creditworthiness remains unquestioned and there is such a dearth of other options.

More bending. Still no breaking.

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