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

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BDC FIXED INCOME

Stable

The 10 Year Treasury had another stable week price-wise, continuing a month long trend.

The same can be said of the median price among the 37 BDC Fixed Income issues we track.

For the week, the ending median price was $25.39, very close to $25.36 the week before and $25.31 the week before that.

In fact, the median price is exactly the same as a month ago.

Lower Premium

However, we do note that no issue ended the week at a price of $26.00 or above for a second week in a row.

Like last week, there were several issues trading below par, but the number had dropped to 4 from 5.

Moreover, the lowest price recorded has slightly increased to $24.48.

As before this was Capitala Finance‘s Convertible with the ticker CPTAG.

The price closed at $24.48, 1% up from $24.23 last week.

Investors might have been cheered by the BDC’s recent results.

Dribs And Drabs

When KCAP Financial reported its own quarterly results, the BDC announced entering into a new Revolver, secured by its remaining on balance sheet loan assets.

Job 1 for KCAP is to draw $20mn from the new financing and repay another portion of its 2019 Notes with a coupon of 7.375%.

Of the $27mn remaining in the issue – which has the ticker KAP – $20mn will be retired.

Even with a relatively expensive Revolver (LIBOR + 325 basis points) KCAP should save itself about 3% a year or $0.600mn.

For a BDC whose Net Investment Income was only $11mn last year that’s a material savings.

Readers don’t need the BDC Reporter to assume that the remaining $7mn of KAP Notes will get the heave-ho before long.

Old News

Also redeeming in part is Medley Capital – as previously announced – which is repaying a portion of the Baby Bond with the ticker MCV.

Redemption notices are out to holders of the Unsecured Notes for March 10.

However, there’s plenty of MCV still outstanding, unlike KAP.

There are now 5 BDC Fixed Income issues either being repaid in full or in part.

Thumbs Up

Once a year Fitch Ratings reviews its assessments of the small number of BDCs which have longer term Unsecured Notes and an investment grade rating.

This week, the rating agency affirmed its rating on Ares Capital at BBB. The BDC has one public Baby Bond outstanding: AFC.

Also affirmed were the ratings of several other BDCs with publicly or privately traded debt including TPG Specialty, PennantPark Investment, BlackRock Investment, FS Investment, Solar Capital and Apollo Investment.

(Only Apollo’s Baby Bond with the ticker AIY is listed on the BDC Fixed Income Table, and that’s likely to be called later in 2018).

All the BDCs mentioned receive a BBB- rating – a step down from ARCC – and Outlooks that vary from Positive, Stable or Negative.

Reading through Fitch’s press releases on the subject, it’s clear that the credit standing of all these funds remains in good standing under current market conditions.

The only BDC marked with a Negative outlook was PennantPark Investment  (PNNT) for these given reasons:

“The Negative Outlook continues to reflect the potential for incremental credit losses on the remaining energy portfolio and longer-tem execution risks of PNNT’s strategy, which reflects management’s three-point plan to rebalance the portfolio toward more senior investments, increase portfolio diversification and monetize equity investments, allowing for the redeployment of proceeds into yielding debt investments over time”.

For what it’s worth, the BDC Reporter has reviewed the latest PNNT portfolio listing and come away more optimistic than in a very long time about the BDC’s credit outlook.

Coming Up

Going forward, we will be sharing our own internal credit rating on all public BDC Fixed Income issues, which uses an A through F scale and covers a much broader number than Fitch.

Spoiler Alert: Even when “Stress Testing” portfolios with 20%-50% haircuts (depending on asset type), most every BDC Fixed Income issue gets a passing grade.

Look Out

However – as every 10K reveals – the BDC Sector is pushing the Congress hard to allow a huge increase in leverage which could wreak havoc with the near certainty of debt holders receiving full repayment in the Next Crisis.

All the stability that we’ve been reporting could be subject to change if Congress gives in to the desire for many BDCs to be able to load up on debt.

The senior secured Revolvers provided by the banks or CLO instruments won’t be affected but BDCs are likely to double down on Unsecured Notes, all ranked pari passu.

That could change Fitch’s ratings in the future (and ours).

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