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BDC Fixed Income Market Recap: Week Ended February 23, 2018

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BDC FIXED INCOME

Steadfast

This week we’ve added one more BDC Fixed Income issue to the 36 on the BDC Reporter’s list: NEWTI.

More on that below.

With that said, the median price for the now 37 publicly traded BDC Fixed Income issues outstanding – which we use as a rough indicator – was at $25.31 for the week.

That’s slightly down from the week before at $25.39 but equal with a fortnight before when the median was $25.30.

That may be slightly tilted towards the downside as there are 3 issues which are shortly to be redeemed in part or in full, but gives a fair idea of where BDC debt stands.

For the first time in a while we have no issues trading over $26.00 a share – versus 1 last week and 4 or 5 in the past.

Again, there are 5 BDCs trading below par, same as last week.

However, the lowest priced issue is at $24.21 (CPTAG), compared to last week when the lowest  priced issue was at $24.32 (GECCM).

[CPTAG now yields 5.94% versus 5.75% at par].

Risk Free Rates

Of course, this week saw the risk-free Treasury yields increase across the board, as the chart below shows:

The 5 year Treasury has increased by 27% in yield in just one month and the more famous 10 Year by 11%.

This is affecting BDC Fixed Income prices as we’ve been seeing but only by 1% to 2% on average.

Issues like CPTAG are more of the exception , where the difference between its 52 Week Low and High has been 7%.

Where BDC common stocks – as readers of our Market Recaps will know – are in Correction or even Bear mode, Fixed Income is mostly having a bad hair day.

Pundits are predicting the 10 Year could go up t0 3.5% by the end of 2018, and the Fed is expected by EVERYBODY to raise rates 3 or 4 times, which could further erode prices.

On the other hand, the market consensus has been wrong before…

Trading

As mentioned up top the Newtek Business Baby Bond that was just issued to refinance its NEWTL sibling has begun trading.

We’ve added NEWTI to the BDC Fixed Income Table and reached a recent high in the terms of number of BDC issues to choose from.

As of Friday, NEWTI was trading at $25.15 and yielding just under 6.25% for debt that can’t be redeemed till March 2020 and which matures in 2023.

The BDC Fixed Income Gods still giveth and taketh away.

Readers of our recently launched BDC Fixed Income News Table will know that Hercules Capital will be redeeming $100mn of its HTGX Baby Bond on April 2, 2018.

NEWTL, too, is headed for the chopping block. In full.

Medley Capital (MCV) is redeeming $13mn of its MCV Baby Bond to save itself interest expense (6.125%) on March 10, 2018.

Otherwise, as we estimate in the BDC Fixed Income Table, early redemption risks remain very high for many issues in 2018.

Apollo Investment (AINV) has twice warned of its intention to repay its 2043 Unsecured Note with the ticker AIY at the first opportunity.

Gladstone Investment (GAIN) is flying high right from a common stock price and performance standpoint. The BDC is likely to do something about one or more of its 3 issues outstanding.

All 3 are repayable in this year and GAINO is already in the crosshairs.

Can GAIN borrow at a lower rate than the current 6.750% for GAINO ? We think so, even with the increase in the risk free rate.

Credit Unconcern

If markets are pushing back on BDC common stocks about concerns about another recession coming round the corner, there’s no evidence Fixed Income investors are worrying on that score.

Medallion Financial‘s (MFINL) high yielding Baby Bond – the only issue in the last two years to make investors anxious – has bounced back completely and trades at $25.40.

Conclusion

Taking the majority view on interest rates, expect some more price erosion on existing BDC Fixed Income issues.

However, both the redemption and new issuance windows are open and that could play out any number of ways.

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