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

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BDC FIXED INCOME 

Enough Already

The 10 Year Treasury yield, after rising inexorably for weeks, has stabilized of late. Here is the 6 month chart, which shows the yield peaked February 2, 2018.

On the week, the yield was down (0.07%). For the last month, the change is an increase of just 0.11%.

Coincidentally or otherwise, BDC Fixed Income prices have stabilized too.

This week the median price in our 37 issue universe was $25.36, up from $25.31 last week, and down from $25.39 and $25.40 in the two prior week ends respectively.

From highest to lowest in that one month period the difference is just 0.4%.

Confirming

Essentially all the other metrics we look at weekly are also very stable, give or take a Baby Bond or two.

Last week we had no issue trading over $26.00.

This week, we had 1 (CSWCL): Capital Southwest’s recent Unsecured Note offering.

Last week, we had 5 issues trading below $25.00 par.

This week, we had 5 again.  Same as the week before.

The lowest priced issue remains Capitala Finance‘s CPTAG, up two cents on the week at $25.23.

That’s a yield of 5.9% for debt that will not be redeemed till its maturity date in 2022.

Perspective

As we did recently where BDC common stocks are concerned, we looked back into our archives to see where BDC Fixed Income stood a year ago.

Back on March 4, 2017 there were 35 issues to choose from and the median price was $25.69 (up from $25.32 in December 2016).

Last year we had only 1 issue trading below $25.00 and 3 above $26.00.

Still, the average price drop – using an admittedly rough measuring tool – is only down (1.3%).

Compare that to a chart for BDC common stocks for the past 12 months, which shows prices are off  (17.4%).

BDC common stock investors will be asking themselves if the less than 4% premium in average yield for holding equity will have been worth the 16.1% differential in price drop over the past year.

Again – very roughly – BDC common stocks Total Return has been about (7.5%) in the last 12 months versus 5.0% for Fixed Income.

Just saying…

News Of The Week

The BDC Reporter has been warning for months that there is a possible huge number of existing BDC issues likely to be redeemed in 2018.

Two months in and that’s proving to be the case.

Yet another BDC announced its intention to call in its chips years before the final maturity date.

Main Street Capital  (MAIN) announced this week it’s intention to redeem its only publicly traded Unsecured Note offering, due in 2023: MSCA.

The 6.125% Baby Bond will be recalled and holders paid off April 1, 2018, as we reported in the BDC Fixed Income News this week.

The debt is being repaid with MAIN’s Revolver, but we wouldn’t be surprised to see another Unsecured Note offering coming down the pike.

That brings to 4 the number of BDC Fixed Income issues in part or full redemption mode this year.

We expect many more to follow, especially if rates stabilize where we are at the moment.

On The Grapevine

Given that this is earnings season we’ve been hearing a lot from BDCs about their hopes and dreams.

Some of that has involved management’s plans for Fixed Income.

For example, Apollo Investment (AINV) once again announced its intention to redeem early its 2043 Baby Bond with the ticker AIY 25 years early.

The Baby Bond is eligible for early repayment July 15, 2018.

It’s Not Over Yet

At the same time, AINV suggested another unsecured debt offering – at a narrower spread – was under consideration.

BDCs are too clever – and still smarting from the Great Recession – to rely for debt financing on their bank relationships alone.

That might – or might not – result in another public debt issue from AINV before long.

Around The Corner

Much more certain is that OFS Capital (OFS), which has historically relied on the SBA for long term borrowings, will shortly be issuing Unsecured Notes.

Besides its shelf filing, we know this from the numerous in passing comments made in the BDC’s Conference Call.

This is partly due to the growth plans of OFS and partly due to an SBA that has become less generous in handing out SBIC licenses.

Different Directions

It’s amusing that as BDCs are (apparently successfully) lobbying Washington to allow them to leverage themselves up, the SBA seems to be pulling in the reins in their corner of the leveraged finance world.

When the SBA’s limit on aggregate debenture issuance by one issuer was raised to $350mn some time ago, we expected many BDCs to climb towards the new summit.

That has not happened and some BDCs are spending as much capital repaying the SBA as drawing new funds. See what’s happening at Fidus Investment (FDUS).

There are several long-in-the-tooth SBIC licenses out there where debentures are reaching their 10 year term and need to be repaid.

This might cause ever more smaller BDCs to tap the Unsecured Note market, both to repay the SBA and to grow.

Worth watching in 2018.

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