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BDC Update For Monday February 5, 2018

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BDC UPDATE MONDAY FEBRUARY 5, 2018

NEWS

Very little in way of BDC news as we write early in the morning of Monday. HRZN is restructuring a loan to one of its borrowers which involves some immediate pre-payment, further payments later and a security interest in some of the borrower’s assets. More on that in a future edition.

MARKET

We don’t want to bury the lead – as journalism folk like to say – which is that the markets are in a foul mood globally, and the BDC sector is no exception. We don’t want to hang too much on any dataset because these will change throughout the day – and in the days that come. However, shortly after the open, the Exchange Traded Note with the ticker BDCS – which serves as a proxy for the sector – was down (0.9%). Readers will know that’s (yet another) 52 Week Low at an intra-day low of $19.48. BDCS is trading at a level not revisited since April 2016. If this goes on much longer, all the gains racked up since the February 2016-March 2017 rally. Just as a point of reference BDCS closed on February 11, 2016 at $17.26. That’s maybe not next door. More like just one freeway ramp away.

42 out of 46 public BDC companies we track were down in price. The number of BDCs reaching New Lows was up by 9, and the number of stocks trading within 10% of their 52 Week Lows was up to 36 from 32. Likewise, the number of BDCs trading within 10% of their 52 Week Highs had slimmed down to just 4 names from 7. When we looked at how BDCs were still trading above their 50 Day Moving Average after the carnage in the markets, the number – again – was just 4. That means 42 BDCs are underwater and dropping lower even though the last 50 days have hardly been buoyant where prices are concerned. Only 7 names are still trading above book and 39 are below.

We wrote about what’s been happening to BDC common stocks in our Market Recap over the week-end. “Duck and hide” was our advice then and remains the same. This too shall pass – maybe even as we’re writing this – but we’ve been through periods like this before and we know from hard experience that the markets don’t give a fig for fundamentals, or Dividend Outlooks or the BDC Reporter’s deep-dive analysis (or yours) when the panic is in. “Get out” is the modus operandi. Bad if you’re a BDC investor, good if you’re a (bold) prospective investor.

We can’t help noticing that many of the most popular BDCs – those that have traded above NAV and/or at record highs for many months are also taking their lumps. ARCC is less than 1% off its 52 Week Low and 12% off the High. GBDC – much revered and still trading above NAV- is within 2% of the 52 Week Low. GSBD – the Goldman Sachs contribution to public BDCs – is 3% off the low and 16% off the high. Even MAIN – which many investors have built temples to – has managed to drop below $37 a share and is just 1% from that 52 Week Low.

NMFC – whose distribution and earnings have hardly changed over the years – has reached a new 52 Week Low, continuing a trend we’ve been writing about for some time.  TSLX – which never seems to set a foot wrong has dropped nearly $2 a share from its highest level and is less than 2% off the bottom.

By contrast the BDC Fixed Income sector is weathering this storm – arguably the worst since November 2016 – pretty well, relatively speaking. The median price of the 35 we have in our Fixed Income Table (which does not yet include the new FDUS Baby Bond) is at $25.25.

That’s down from last Friday’s close, which was at $25.33, but only 0.3% down. So far. In the past we’ve noticed that BDC Fixed Income holds up well in the beginning of one of these market reassessments as investors hunker down in the relative safety of debt. If the crisis goes on for a lengthy period – and investors start to really become concerned about the future – even the debt seems like inadequate protection and prices drop even there. As we mentioned in the BDC Fixed Income Market Recap (we’ve detached the common stock and fixed income recaps into two different articles), the first casualties of BDC investors losing their nerves are the issues held premominantely by retail investors. That’s already happening to some degree with GLAD’s only Term Preferred with the ticker GLADN down 3% or more since this brouhaha began.

This has little to do with the direction of interest rates or credit concerns or the availability of better investments elsewhere but with that oldest of market motivators: fear. Some investors would rather be in cash than be lashed daily by the markets uncertainties. We completely understand. However, that phenomenon has not yet kicked in, and may not this time round. We still count only 5  BDC fixed income issues trading below par and none by more than 3%. We’ll be watching.

EARNINGS CALENDAR

As we’ve been droning on for weeks, BDC Earnings Season just happens to be beginning this week in the midst of this market chaos. How the combination of hard results and new revelations will figure in with the general malaise is hard to predict. There are 6 BDCs releasing quarterly numbers. According to Dow Jones the mean analyst earnings estimate for 5 of the BDCs is at or slightly above their current distribution level. Only PFLT- which recently raised new capital – is projected to fall slightly short of its payout.

The most intriguing to follow will be PSEC and MCC. Both funds have been under-performing and cutting distribution levels in recent quarters. Both have credit troubles which were unresolved at the end of last quarter and which will be updated.

However, PSEC’s stock price has held up well, partly due to remarkably high levels of insider buying by their Chairman Dave Barry. We may learn why Mr Barry has been accumulating huge positions in the stock, or we may not. Recent Conference Calls have been curious affairs, with analysts getting few questions posed and management seemingly deliberately giving a flood of information about some subjects (TMI in our opinion) and nothing about others. Also interesting – as usual – will be to see how PSEC has valued its CLO investments. Investors will know that the BDC has an idiosyncratic methodology on this subject which can affect greatly key results like Net Investment Income and NAV. The BDC Reporter has a Dividend Outlook of AT RISK for PSEC – its recent dividend cut notwithstanding.

MCC’s stock price has been plumbing new lows of late, despite the Investment Advisor’s commitment to reducing risk in the portfolio and despite its own curious insider buying but which is funded by third party investors. At its highest point MCC was peeked over the $8 level and is now at a new 52 Week Low of just $5.010. We have a Dividend Outlook of DECREASE for MCC. Although the BDC trades at a huge discount to book, if the payout gets cut this quarter (or next), expect yet another price drop.

On paper, earnings releases from CSWC, GBDC, GLAD and PFLT should be less controversial unless any of these recent high performers – both in business and stock price terms – should unexpectedly trip up. Then all bets are off.

NEW SUBSCRIBERS

The BDC Reporter welcomes our too-many-to-count new subscribers in recent days. Frankly, this is a very important time to be keeping more than one eye open where BDC investing is concerned. At times of market disruption BDC bargains can pop up, even for names that have previously traded at considerable premiums to fair value. These windows rarely stay open for long. There are too many canny investors with too much money for that to happen. Currently the BDC Sector is some way off being dirt cheap or even universally good value but with prices overall down about 20% from the optimistic highs of March 2017 value buyers have the best opportunities that we’ve seen in a very long time. Our principal caveat – after having been swung in both upward and downward directions multiple times over the past 12 years – is that the BDC sector (like many others) tends to overshoot in both directions. Or – in other words- prices could yet go a lot lower if the markets go into full panic mode. Here’s a useful indicator: if BDC Fixed Income prices start to crater, we’ll know investors are looking for lifeboats rather than opportunities.

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