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BDC Market Update For Thursday February 8, 2018

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BDC Market Update For Thursday February 8, 2018

NEWS

Of course, BDC news has gone from slow to there being so many developments the BDC Reporter is having a hard time keeping up. After all, we first have to corral all the latest news, then read the press releases, filings, presentations etc; identify what’s important and new and what’s not and translate that into views you can use. We also have to put all of that onto digital paper and into our various Tables. We are traveling so we’re behind with the Daily News Table.

Here’s what we know after reviewing to greater or less degrees the first 12 BDC earnings releases. Premium readers will have already seen our Dividend Outlook update for MCC and our most recent review of  OCSL, the first BDC to cut its distribution in 2018, and in our DECREASE list for months.

The key headline is that there have been relatively few surprises, at least from our perspective. From a positive point of view, GBDCCSWC, GLAD, AINV, TICC, PFLT, PNNT and PSEC  met our expectations. We’ve read all the available earnings releases, the Conference Call transcripts, and the 10-Qs, in most cases.

CSWC continues its march onward and upward with higher earnings; debt to equity of only 0.3 to 1.0 and no loans on non accrual. The key question remains: what will peak recurring earnings look like if nothing comes along to mar the ever improving results ? At the current level the BDC’s annualized Net Investment Income Per Share is $1.08. Can CSWC hit our optimistic estimate of $1.40 per share when all is said and done ? Management spoke to the status of its largest and non income producing investment on the Conference Call – which we had highlighted in our Earnings Preview article – and suggested the eventual sale of the position was very much on their minds. We may not see a realization for a few quarters, but if Media Recovery does continue to increase in value as CSWC anticipates converting that Realized Gain into yield bearing investments could be a major fillip to recurring earnings. Dividend Outlook continues at UNCHANGED. ( We don’t have an INCREASE category, but if we did CSWC would be on there).

GLAD, despite having more shareholders to feed, maintained its very stable earnings track record and distribution pattern. For once, the Investment Advisor didn’t have to make major fee concessions to ensure the dividend was covered. How much longer GLAD – whose portfolio profile is relatively high risk – can avoid the credit stumbles that cause distributions to be cut remains to be seen. However for 2018 there seems to be no material change coming. One analyst even tried to get a timetable for a dividend increase out of the Investment Advisor, who nimbly dodged the loaded question. After all, we are in the last innings of this economic expansion; other lenders are constantly squeezing margins and GLAD is well leveraged. Holding at the current level will be achievement enough. We affirmed our Dividend Outlook at UNCHANGED.

Two BDCs have outperformed our expectations. GAIN – which has been of a run for some time – performed even better than we had anticipated. Likewise, for CMFN which appears to be in better shape than we thought previously. With the caveat that we’ve not yet reviewed the portfolio name-by-name, the BDC appears to have tackled most of its troubled credits and benefited from Sprint guaranteeing one of its Watch List names : PR Wireless. CMFN received a black eye for being heavily invested in energy a few years ago, which caused its NAV and dividend to be reduced shortly after going public. Ironically, the current upsurge in the oil price is helping the prospects of the BDC as energy remains a major industry concentration. We are upgrading our Dividend Outlook for CMFN from DECREASE in 2018 to the more ambivalent AT RISK.

Only MCC  and OCSL –  both perennial under-performers have put up poor results. As we said, this was not unexpected by the BDC Reporter, but recurring earnings per share at $0.13 were lower than the analyst median at $0.16. MCC has announced a dividend unchanged for the IQ of 2018, but can the slip sliding BDC continue to pay out $0.16 much longer ? OCSL has already bit the bullet and cut the distribution.

MARKET

What a difference a couple of days makes ! After just about every BDC common stock dropped in price by large percentages and the sector hit new lows on Monday, we were  back up on Tuesday morning, but slumped moderately at the Thursday close. This is all happening faster than we can write the play-by-play.  As of Thursday’s close BDCS is  at $19.37, after hitting a low of $18.72. That’s a 3.5% increase in a matter of a few days. For the moment the market is still some way from getting back to Friday’s $19.70 close. 40 of 46 stocks are down in price on the day. As many were up yesterday.

One illustration of this volatile market:  GAIN is up a double digit percentage. That’s following a big drop prior to earnings and prior to the market meltdown as jittery (or cautious) investors took their profits, only to jump back in when the BDC reported better than expected results. Welcome to BDC investing ! Rarely a dull moment.

That’s a rational response as is the drop in MCC’s stock to a new All Time Low as the market begins to come to grips with what the BDC Reporter has been worried about for some time: another potential cut in the quarterly distribution.

Still only a few BDCs are trading above their 50 Day Moving Average. All of the names are among the sector’s walking wounded, whose stock prices have been pummeled previously for one reason or another. The most intriguing is TCAP, which has bounced back after the market meltdown. Investors remain optimistic that the pending sale of the BDC – Houlihan Lokey has been busy hawking the troubled fund for weeks – will result in a boost in the value as wannabe buyers pay top dollar. That’s the hope at least. However, last time we took a deep dive a couple of weeks ago into the BDC’s portfolio, we came away depressed at how many non and under performing investments there were to contend with. The market may be hoping for a top dollar paying buyer on a white horse, but there is also the possibility of further credit bad news and a lower book value and another trimming of the distribution. The upside seems relatively limited but a prospective drop seems to have further to go. We will see in a few weeks when the latest results come in.

We count 27 BDCs trading within 0-5% of their 52 Week Low. We’ve been as high as 30. Likewise, there are 8 names within 5% and 10% of the 52 Week Low. That’s 35 of 46 public BDCs trading low and we count only 5 trading within 10% if their 52 Week High. This almost comprehensively illustrates our long held conviction – based on a decade plus of real life experience in BDC investing – that “they all go together when they go”. Whether the sector is headed up or headed down – and despite the fact that there are very wide variations in performance among these 4 dozen BDCs – most all of them move in lockstep. This time is no different.

INVESTING

As a glance at our Investment Disclosure will show, we have been busy buying and selling in this hot house market atmosphere. For the first time in a very long time several “quality” BDCs which have received our best long term internal ratings have dropped in price to levels where can foresee making a decent return over the long term or which are more likely to bounce back in price when the current negative market sentiment changes.

We bought CSWC, TSLX, MAIN, GBDC and MRCC, all of whom fit the Quality category. In addition, we added to existing positions in OFS and NEWT. Both are BDCs we believe in for the long term, but have seen big drops in their recent prices. All of these BDCs we expect to maintain or increase their distribution in the year ahead. Neither the recent price movement nor what financial information we’ve learned in the past 72 hours has changed our view.

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