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

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BDC FIXED INCOME

Weaker

Judging by the metrics we typically use, the BDC Fixed Income segment was weaker in the week ending March 23, 2018.

The median price of the 36 issues we are tracking (NEWTL was redeemed on Friday, as discussed below) ended at $25.30, down from $25.39 the two prior weeks.

That’s one of the lowest levels in recent memory.

Moreover, no Fixed Income issue traded over $26.00.

In fact, the highest closing price was $25.95 for the most recent issue: the Newtek Business Baby Bond with the ticker NEWTI, which can’t be redeemed for two more years and matures in 2023.

Under $25.00 

There were 5 issues trading below par versus 4 last week.

The lowest recorded price was $24.40 (GECCM, which closed the week in exactly the same position and price as the week before).

We had a look at how many Fixed Income issues were trading above their 200 Day Moving Average.

(It’s not a data point we review regularly, but what the heck ?).

Only two issues were in positive territory, and 34 were negative.

The Above Notwithstanding

We are not (yet) unduly concerned about BDC Fixed Income, despite all the above.

Given we are in March, multiple issues have just gone ex-dividend on their quarterly distributions, which may be serving to tamp down prices.

Moreover, the great upsurge in medium and long term rates continues to be on hold.

The 10 Year Treasury closed the week at 2.83%, almost unchanged from 2.85% the week before and 2.89% the week before that.

Anxiety Producing

The Big Question, though, is whether BDC Fixed Income debt holders are going to begin to worry about the implications of the new BDC rules.

Of course, we’re referring to Washington D.C. giving BDCs the green light to as much as double allowable leverage and maintain a minimum of 150% asset coverage of all borrowings.

Before the news broke we’d heard from investment bankers, investors and analysts that an increase in BDC leverage would be met by major defections from many investors.

Most recently, when we were talking to the firm which underwrote Medley Capital’s (MCC) Baby Bond offering in Israel, we asked what the reaction of their clients might be to the possibility of much higher debt on BDC balance sheets.

Not favorable is the response we received.

Will we see a broad sell-off of BDC Fixed Income holdings in the weeks ahead as investors seek to get ahead of potential credit issues that might come down the pike ?

We don’t know but we’ll be watching out.

Early Days

Our own view is that some time will have to pass before investors will be able to determine which BDCs Risk Profile might be materially changed by taking advantage of the new rules.

Moreover, for the bigger BDCs with Fixed Income issues which have received investment grade ratings, we’ll be curious to see the response of the rating groups, such as Moody’s, S&P, Fitch and Egan Jones.

However, some investors might decide to bail now and ask questions later.

In Other News

Otherwise, there was little other news where BDC Fixed Income was concerned in the week.

As we’d previously reported, NEWTL was redeemed on Friday March 23 at the close, with a last price of $25.38.

That leaves Main Street‘s Baby Bond with the ticker MSCA as the next issue scheduled to be paid off in full, with a due date of April 1.

Both Hercules Capital’s HTGX  and KCAP Financial’s KAP are being or have been redeemed in part, which leaves the BDC Fixed Income universe at 36 names.

See the BDC Fixed Income Table.

Looking Forward

Whatever one’s opinion of the new BDC leverage rules are – and we’ve expressed our disdain for the way in which this monumental change occurred, derided the so-called benefits for small business and questioned whether shareholders will receive ANY long term benefit.

(We have no doubt the managers will benefit considerably so have no concerns in that direction).

Popular

However, for BDC Fixed Income investors these new rules might result in a spate of new Unsecured Note offerings in the months ahead.

To take material advantage of the new leverage liberality, secured financing from bank lenders can help BDCs only so much.

As a result, we won’t be surprised to see numerous existing and new BDC issuers tap the unsecured debt markets.

Safe Or Sorry ?

Whether the new issues will have anything in way of investor protections and how much different BDCs will push the risk envelope will remain to be seen.

Nonetheless, we might see the number of public Fixed Income issues reach a new record.

However, would-be BDC Fixed Income investors would be well advised to take a hard and realistic look at the risks involved, especially under the extraordinary and once in a decade conditions of a recession or financial crisis.

Different

With many BDCs taking very different approaches to risk management there may be considerable variation in how BDC unsecured debt fares when you-know-what hits the proverbial fan.

The BDC Reporter will be looking at both existing and new issues using our Stress Test methodology which include expectations of 20%-50% drop in asset values and a host of other pro-forma conditions inspired by how markets behave in recessionary times.

We’re guessing that the almost uniform bulletproof nature of BDC balance sheets might evince some individual cracks when Stress Tested.

Stay tuned/subscribed.

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