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BDC Common Stocks Market Recap: Week Ended July 20, 2018

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BDC COMMON STOCKS

As Predicted

As rarely happens, the BDC Reporter predicted which way the market might move this week in our last Market Recap and were proved right.

(We also predicted England would win the World Cup, so we’re clearly not infallible).

The rosier sentiment we had begun to notice a fortnight ago continued and accelerated in the week ended July 20.

The Wells Fargo BDC Index was up 2.2% in the period.

More tellingly, we noted that 42 BDCs saw their prices rise on the week, and only 4 fell back.

Last week we were at 23 to 23.

Other Indicators Flashing Green

Momentum, too, suggested rally-like conditions.

33 BDCs are now trading over their 50 Day Moving Average and 31 over the 200 Day Moving Average.

Not So Low

Another sign that good times are rolling – for this week at least – is that the number of BDCs trading within 5% of their 52 Week Low is itself at a low of 2. 

Last week the corresponding number was 5 and the week before 4.

Specifically Speaking

If you’re wondering who’s scraping the bottom, it’s not surprisingly Medley Capital (MCC) and – surprisingly – Solar Senior Capital (SUNS).

At the other end of the spectrum, there are now 7 BDCs trading within 5% of their 52 Week High, and 16 between 5%-10%.

That’s half the BDC universe we track within spitting distance of their highs.

Fast Movers

Most impressive of all from the BDC Reporter’s standpoint were the number of BDCs whose price moved up 3.0% or more on the week.

Last week there were 5. This week: 11.

Almost as telling, no BDC dropped more than (3.0%) in price, with the Biggest Loser (GECC) down only (1.2%).

Sticking With Our Hypothesis

As we suggested last week, investors seem to positioning themselves for the upcoming earnings season, mostly anxious not to miss the trains that might be leaving the station by getting on early.

Finally – and to put all this price talk into a wider than one week context –  BDCS is trading at its highest level since January 24, 2018 and above all but two weeks of this year.

Quiet-ish

You won’t find the explanation for this week’s BDC sector bounce in the news column.

As always the BDC Reporter read every BDC filing, press release and insider buy.

A few items were important enough to require a full fledged article as regular readers will already know.

A few others were parsed in our Daily News Table, where we add brief, but trenchant, commentary when the opportunity arises.

However, there was nothing market moving in either the big stories or the minor developments.

Mostly, BDCs seemed to be planning for the future and working on the unglamorous but necessary business of raising more capital.

Exception To The Rule

The Most Interesting News Item Of The Week – if we ran such a contest – was the news that renowned Wells Fargo analyst Jonathan Bock joined Barings, which will shortly take over Triangle Capital (TCAP).

It’s unusual for an analyst in any sector to go from reviewing and commenting on a brace of companies to managing one.

Apparently – according to the Barings press release – Mr Bock – who is called a “thought leader” – will be a managing director in the Barings Global Private Finance Platform.

The press release adds: “Barings also intends for Bock to serve as Chief Financial Officer of Barings BDC, Inc”.

This appears to be yet another plank in the Barings campaign – which began with the proposed acquisition of the TCAP Investment Advisory contract – to be seen as “shareholder friendly”.

Define Friendly

Of course, all BDCs proclaim themselves as such, but you can say anything you want in a press release or Conference Call and analysts – even those willing to “speak truth to power” – are usually too polite to contradict.

The BDC Reporter knows that there is a huge variance in how both internal and external managers treat their owners.

That’s reflected in the broad range of management fees charged (08% – 2.0% of assets); incentive fees (0%-20% of profits after costs); “Look-Back” features (some have them, some don’t), and a myriad other charges.

Then there are subtler items like whether the CEO of the BDC is also the Chairman of the Board;  whether all Taxable Income is paid out to shareholders or hoarded (very controversial) and how much “skin in the game” the managers have.

We also look at subjective items such as whether a BDC holds regular Conference Calls (at least one does not) and how candid the managers are in taking and answering questions.

Disclosures in the SEC filings are also important. Some BDCs provide quarterly internal portfolio risk assessments and some don’t.

We even look at how clearly footnotes are presented in the quarterly filings and what information is being called out or quietly buried.

Hitting The Snooze Button

Of very little interest to most investors – judging from reactions to articles we’ve written in the past – is the subject of corporate governance which includes where BDCs incorporate themselves; how they draft their by-laws and select their Boards.

Yet these are critical items when BDCs are under-performing, and which can greatly aid the insiders to ward off necessary changes that disgruntled shareholders might seek to bring.

Put To The Sword

We’ve seen the (almost) unbridled power of the incumbent in numerous instances over the past twelve years.

Off the top of our head we can list multiple instances of “shareholder unfriendly” behavior, at least by our lights.

There were numerous instances at both Fifth Street BDCs (FSC and FSFR, now both controlled – not a coincidence – by Oaktree Capital); Oxford Square (formerly TICC, which repulsed two “activists” simultaneously); Medley Capital ; MVC Capital, Great Elm Corporation and Full Circle Capital and Hercules Capital.

And we’re just getting started.

Candidly Speaking

In fact, we like to say to anyone who will listen that no BDC out there is truly “shareholder friendly” , if held to the purest standard where the company is managed with the interests of the shareholders predominantly in mind.

That’s partly to do with the fact that most BDCs have no personnel or premises of their own and are managed, directed and controlled by a third party group.

It’s also one of the realities of all public companies that there are divergent interests between those who supply the capital and those who manage it.

This shall always be so, but is aggravated where BDCs are concerned and not made any easier by the huge amounts at stake.

Several BDC founder/managers are on the road to becoming billionaires (yes, we used the B word) thanks to their asset management activities.

How the BDC earnings cake is cut between shareholders and insiders can be the difference between that Manhattan brownstone and something less lavish.

Not Resigned. Realistic.

For our part, we’ve given up looking for a fully “shareholder friendly” BDC and are settling for insiders who are “reasonable”.

That is: a BDC that does not charge too much relative to its peers; avoids raising capital below book; has some of its own skin in the game; does not take “excessive” risk, communicates candidly and avoids nakedly self serving corporate actions.

We’re very much guided by what BDCs have done, rather than what they say.

Here We Go Again

We even keep a list. (The BDC Reporter is an avid list maker).

This is a very subjective subject so we won’t name names, but we can say that we find two-thirds of BDCs “reasonable” enough to invest in for the longer term.

One-third we do not and have stricken from our prospect list whatever the price.

Too much danger that an “unreasonable” action may seriously impact our returns as a shareholder.

Flexible

We like to think we don’t hold grudges and our views evolve.

Internally managed Hercules Technology (HTGC) is marked again as Reasonable, after a long hiatus following the CEO’s attempt to join the Billionaire’s Boy’s Club by asking shareholders to allow a company he would own to become the external manager.

Challenging Days Ahead

However, we’re also realistic that the great changes in BDC economics brought on by the Small Business Credit Availability Act may tempt many managers into “shareholder unfriendly” actions.

That’s what can happen with conflicts of interest.

We expect our Reasonable List (we can’t come up with a better term) will be changing a great deal in the months ahead.

You’re On The List

However – and getting back to the subject at hand – Barings was already on our Nice List before Mr Bock was added to the team.

With his addition to the soon to be repositioned and renamed BDC, we have some hope that Barings will be at the forefront of Reasonable BDCs.

If that list of ours should begin to grow, spurred on by the likes of Barings and Bock, there’s a good chance that this BDC rally might keep on going.

One Last Thing

Oh, plus the increasing possibility that changes to the AFFE rules that might allow BDCs to be re-included in the major indexes. See this link for a useful summary of the issues.

However – as they say – “that’s a good story for another time”.

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