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BDC Fixed Income Market Recap: Week Ended February 9, 2018

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BDC FIXED INCOME

Taken Aback

Frankly the BDC Reporter has been surprised by how well BDC Fixed Income prices have fared in the current “crisis”.

After all,  the ten year Treasury yield  is going up lickety split, creating multiple headlines in its wake.

Holders of existing Treasury instruments are getting shellacked and every day investors are being warned that inflation – like the British in an earlier period  – are coming and everyone should prepare for the worst, including much higher rates across the board.

[As an aside and not to get in the way of a good story but we can’t help noting – given that the BDC Reporter does keep track of such things – that inflation remains very subdued and that the Fed and the markets have cried wolf before only to turn tail. Moreover, there are known unknowns like the price of oil which – last we checked – is prone to boom and bust cycles and we’ve been in a boom price-wise for some time.  Then there’s all those “greying of the population” and “impact of automation” factors that are supposed to change the long term dynamics of the U.S. economy].

Anyway, there was some sturm und drang during the week in the ranks of BDC Fixed Income issues, but nothing on the scale that occurred among BDC stocks or stocks more generally.

Or in Treasuries.

Virtually Unchanged

The median price of the Fixed Income issues we track ended at $25.30. Last week, the median was at $25.33.

Last week we had only 1 issue over $26 a share and 4 trading below $25.00 par.

This week was exactly the same where those metrics are concerned.

We said last week that we were comforted that even BDC Fixed Income issues that had traded down were still within 3% of par.

That continues to be the case, if only by a whisker with Great Elm’s GECCM trading at $24.26.

Why ?

Our surmise is that BDC Fixed Income has proven a quiet port in the current storm as investors assess what the market tantrum – only one week old after all – presages.

Moreover, most BDC issues are shorter term and less vulnerable to rate risk concerns.

Still, even very long term issues like Ares Capital’s 2047 Unsecured Note with the ticker AFC trades at $25.27, a 1% premium to par.

In 2018 AFC has dropped a material – but not drastic – 2% in price and 4% from its 52 Week High.

Amusingly, AFC actually traded up in the week that just closed.

Outlook

The above notwithstanding, there’s only so far this rubber string can be stretched.

We’re guessing – which is all one can do – that BDC Fixed Income prices will move marginally downward in the weeks ahead if the 10 Year Treasury zooms up over 3.0%. At 3.5% we could have a significant shift in BDC debt prices.

Moreover, if investors continue to fret about the end of the economic cycle and a further huge drop in stock prices, BDC Fixed Income could see more sellers than buyers, as happened in early 2016.

When All Is Said And Done

Our own money – literally – is on a drop in prices followed by a bounce-back towards a median price level in the $25.00-$25.25 range.

We’re far from convinced that higher rates are here to stay and certainly no.t at the dire levels some have predicted.

In any case, BDC Fixed Income holders face some loss of value where prices are concerned but those who hold to maturity will be barely affected given that the credit outlook for all 36 issues we track still seems pretty safe.

Canary In Coal Mine

We are still waiting to see a new BDC issuer have to pay a materially higher rate to raise debt, which would signal a change in the market.

In fact, thanks to the two Israeli placed issues of MCC and PFLT and CSWC’s successful Baby Bond placement, the direction of BDC Unsecured Note offerings has been down of late.

 

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