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BDC Fixed Income Market Recap: Week Ended April 6, 2018

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BDC FIXED INCOME

Misleading

Looking at the numbers alone, the week ended April 6, 2018 seems like a ho-hum one for BDC Fixed Income.

The median price of the now 35 issues we track (MSCA is gone) ended up at $25.32.

That’s just 3 cents up on the week before and in the vicinity of where prices have been all year.

As has been the case of late, no BDC traded above $26.00.

On the other hand, only 4 were trading below par versus 5 last week.

A third of all BDC debt issues were trading above their 50 Day Moving Average, and two-thirds below.

However, both the issues in the green and in the red remain price-wise within a narrow band.

Trading volumes – as far as we can tell – remained normal.

No new issues came to market during the week.

Changes

Yet, as readers of the BDC Reporter will already know, this was a seminal week for BDC Fixed Income.

The sector began to face the consequences of the new BDC law which allows up to a doubling of on balance sheet leverage.

Signing Up

Despite some commentators suggesting the new law was going to be a non-event, many BDCs have rushed to gather their “independent” Board members to approve the new asset coverage rules.

As a reminder, this allows BDCs who’ve elected to do so, to maintain asset coverage of a minimum of 150% of debt compared to 200% previously.

In one of the few concessions to investors, Congress requires that BDCs who’ve opted for the new coverage by dint of Board approval only to wait one year before the rule goes into effect.

Here’s what purports to be a list of all the BDCs who’ve jumped on the opportunity to double their leverage:

ARCC, AINV, FSIC, GARS, KCAP, MRCC and PSEC .

(More on that last name later).

Forewarned

The new law – and the rush of several BDCs with investment grade ratings to change their leverage – roused S&P Global Ratings.

The rating group warned that any BDC taking on the new leverage would be at risk of losing its investment grade status.

As we explained in a full length discussion of the subject, S&P warned that the ratings of individual issues could drop by two notches or more, depending on circumstances.

Surprise Recission

In a remarkable turnabout, PSEC – late on Friday – announced its intention to rescind its election.

In a brief but telling SEC filing announcing the decision, PSEC specifically mentioned the S&P warning in explaining its reversal decision.

(We can’t help noting that neither the initial decision to join the Mile High Leverage Club, nor its decision to resign therefrom, was communicated to shareholders through a press release).

Another Way

Also notable during the week was the decision by Stellus Capital Management (SCM) to seek shareholder approval of the new rule after receiving the nod from the “independent directors”.

This would allow SCM – and any BDC that follows a similar path of getting shareholders to OK the new rules – to have access to the increased leverage faster.

Earliest Days

How this will all work out – and what will happen to the risk in both existing and future BDC debt issues – remains unknowable.

There are just too many factors in the mix for the BDC Reporter to make any predictions at this stage.

That seems to be the attitude of the market for BDC Fixed Income issues – as we’ve seen at the top – which has not budged much despite all the behind-the-scenes hullabaloo.

We Suggest

However, Note Holders should not get complacent.

As the fog clears there may be a sudden, and telling, market reaction which could occur this year or in 2019.

In Other News

Unrelated – but important – was the announcement during the week that Barings, LLC will be taking over Triangle Capital (TCAP).

That will result in a new strategy, new assets, new name, new ticker symbol and the planned repayment of both its Baby Bonds: TCCA and TCCB.

For our article on the subject, click here.

That will occur – according to Barings – 30 days after the change of Investment Advisor has been approved by TCAP’s shareholders.

At a stroke that will reduce the universe of public BDC Fixed Income issues to 33 from 35.

Conclusion

We are Living In Interesting Times where BDC Fixed Income is concerned.

The risk-reward – both for BDC shareholders and Note Holders – is going to change, but will vary widely by BDC and by time frame.

Investors in the debt of this space are going to have to pull out their pencils – and their crystal balls.

This is happening as the broader markets are themselves in a state of change and anticipation.

Who’s to say what both short-term and medium term rates will be in the spring of 2019 when most BDCs will begin to add debt to their already highly leveraged balance sheets ?

For the moment, the best we can do is keep close tabs on what is happening – much of it behind the scenes –  both at the BDCs themselves, at the rating groups and in the markets.

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