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BDC Fixed Income Market Recap: Week Ended June 8, 2018

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BDC FIXED INCOME

Fixed Income

If BDC common stocks as a group are in rally mode (see the Weekly Recap), the Fixed Income sector is unmoving.

This week, the median price of the BDC Fixed Income issues was $25.40. Last week the corresponding number was $25.39.

Admittedly, this week there happened to be 3 issues trading over $26.00 versus 2 last week.

On the other hand, there were 6 debt issues trading below $25.00 par, versus 7 last week.

The lowest priced issue was Capitala Finance’s (CPTA) Convertible with the ticker CPTAG, closing at $24.46, up from $24.30 last week.

This is what passes for notable changes in the dull, but important, world of BDC publicly traded unsecured debt.

Pay Off

What was interesting for the week ended June 8, 2018 was that two BDCs chose to buy-back their debt in the open market.

This is different than reaching a redemption allowed date and paying off some or all of a debt offering early.

The timing, the pricing and the notice period are all spelled out in advance when the debt is first issued.

In this case, the two BDCs announced their intention to reduce their debt load by actively “buying in” existing issues at a market price.

Cash Lying Around

Troubled Medley Capital (MCC) issued an 8-K filing announcing its intention to redeem – at the next allowed time – $20mn of Baby Bonds issued on the Tel Avic market.

The subject was chewed on in an article we wrote on June 5, 2018 entitled “Medley Capital: To Redeem Baby Bonds”.

What was “interesting” about this was less the amount involved but the fact that MCC had issued the debt about to be bought in just a few months ago.

Contagion Effect

We can’t help wondering if the conditions that has caused the newest unsecured debt added to MCC’s balance sheet to be unrequited might not extend to its two U.S. registered public issues.

These have the tickers MCV and MCX.

The former is “redeemable” and has been partly paid off already.

MCX is not redeemable till January 2019.

However in Baby Bond terms that’s round the corner.

Much might be happening at MCC which has not yet reached investors ears.

The forlorn BDC is trading at an All Time and 52 Week Low, as we highlighted in an article on June 5, 2018.

We can imagine any number of scenarios that could be underway.

Major Buyback 

On a much bigger scale, Prospect Capital (PSEC) has also offered to buy back on of its numerous unsecured debt offerings.

$300mn of PSEC unsecured debt maturing in 2019 will be bought back – if current holders bite – at $1,020 for every $1,000 of debt issued.

Plus accrued interest.

As we wrote when the news first broke, we don’t understand why PSEC could not wait till the debt’s maturity next summer to put their hand in their pocket.

This is relatively low costing debt by PSEC’s standards: 5.0%.

Unlike MCC, we don’t believe PSEC is in the process of deliberately shrinking the size of its investment portfolio.

Which leaves us intrigued as to why the new CFO at PSEC has chosen this source of action.

We may learn more when the next quarterly results are published in a few weeks.

A Little Bit Off The Top

In the interim, the net result is that total unsecured debt issued by public BDCs is likely to shrink modestly just at a time when the number of issues and aggregate outstandings were poised to rise.

We’re talking , of course, about all that potential demand from debt hungry BDCs who’ve adopted the new leverage rules and can only squeeze so much in borrowings from their secured lenders.

This up and down phenomenon where aggregate unsecured debt outstandings is likely to continue.

Going Down

As we’ve mentioned, several existing Baby Bonds issues are slated to be paid off thanks to the change of ownership and strategy at Triangle Capital (TCAP), soon to be called Barings BDC.

Also likely to cause redemptions is Gladstone Investment’s (GAIN) unwavering determination to take advantage of the new asset coverage rules, down to 150% assets to debt.

That’s going to require jettisoning Term Preferred issues which requires GAIN to maintain the 200% coverage that the BDC sector has known since 1980.

Going Up

On the other hand – as we speculate regularly but very early in the process – we should be seeing BDCs with existing debt issues raise more debt.

Moreover, a number of BDCs that have not yet chosen to issue unsecured debt are considering the idea, including TCG BDC (CGBD) which became the first BDC to receive shareholder approval for the new asset coverage.

That means CGBD could be looking to grow its balance sheet – and needing to borrow unsecured – in the near future.

Too Quiet

This may have been a dull week price-wise for BDC Fixed Income (which debt holders will cheer) but the seeds are being planted for many changes in the several quarters ahead.

In fact, the very nature of the sector – and the risk rewards involved – might be subject to drastic change.

Look – by way of example – at CGBD, which – by our calculations – might add up to $900mn of new debt in order to buy new assets.

Score Card

We’re keeping score of the potential increase in leverage that the new law is bringing on on a BDC-by-BDC basis as intentions become clear.

We are at a very early stage, with just 9 BDCs counted so far and we’re already estimating $3.0bn in new debt requirements.

It’s unlikely that all – or even most – of those additional BDC borrowings will be in the form of secured debt.

A large proportion will need to be raised in unsecured form.

That’s why we continue to project a potential major expansion of BDC Fixed Income  down the road even as two BDCs actions serve to shrink the current size of the sector.

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