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BDC Common Stocks Market Recap: Week Ended July 27, 2018

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BDC COMMON STOCKS

Hanging In There

The week ended July 27, 2018 was nowhere near as robust, where BDC common stock prices were concerned, as the week before.

Nonetheless, the rally that began nearly 5 months ago on March 1, 2018 (using that useful 20/20 hindsight telescope) continues to scrape along.

The Wells Fargo BDC Index – which calculates Total Return – was up 0.3%.

From March 1 2018, that brings the gain to 10.6%.

Our other useful – if rough – measuring tape: the stock price of the UBS Exchange Traded Note of the BDC Sector with the ticker BDCS was also up 0.3% on the week.

That brings BDCS to $20.63 and at its highest point since the early days of January.

BDCS is up 8.3% since the March 1 nadir.

No Straight Line

However, this BDC rally has been characterized by a slow moving upward trend, and many set-backs and pauses along the way.

This week the numbers were mixed.

Yes, BDCS was up but only 21 individual BDCs increased in price or stayed the same while 25 were down.

The prior week, the picture was unequivocal: 42 of 46 were up in price.

Likewise, last week we had three quarters of BDCs charging ahead of their 50 Day Moving Average price level (33).

This week, the number was lower: 28.

However – and this does seem to support the notion that the rally continues – 32 BDCs are still trading above their 200 Day Moving Average.

Last week there were a comparable 31.

Hi-Lo

More confusing are the lessons to be learned – if that’s possible – from the number of BDCs trading close to their 52 Week Lows and Highs.

As of July 20, only two BDCs were trading within 5% of their lows: MCC and SUNS, as discussed in our Market Recap.

This week – and this shifted from day to day – we ended up with 5 names. The 3 additions to this list will be discussed below.

The confusing part is that the number of names trading within 5% of their highs increased from 7 to 8.

This suggests to us – and there are as many ways to read these tea leaves as there are readers – that a strong vein of optimism remains amongst investors.

Stock Watching

In terms of individual price movements there was an average level of drama.

Two BDCs moved up more than 3.0% on the week.

NMFC was up 3.3% and TSLX (boosted by an analyst upgrade) was up 3.1%.

There were three names down by more than (3.0%), but no great surprises.

ABDC was down (5.0%) as investors continue to fret about what IIQ 2018 results will look like.

Over 12 months, ABDC’s stock price is down nearly (50%), a stark reminder of how quickly and harshly the market will punish bad debts and lower earnings.

Also down was TCRD (4.3%), in the same “how-bad-is-it ?” predicament as ABDC.

Again, the THL Credit organization – despite many fee concessions, share purchases and managerial changes – have not yet convinced investors the worst is over.

That stock price is down (22%) over 52 Weeks and (54%) since those credit issues began to pop up in late 2013, as this chart shows:

As we said, the market is a harsh punisher. TCRD’s dividend has been cut 20%, but the stock price has dropped much more.

Investors – and the BDC Reporter which maintains an At Risk Dividend Outlook rating for TCRD – are worried that another pay-out cut might be in the works.

Biggest Investment

Finally, MVC was down (3.3%) on the week, but the dividend was paid out, which may have affected the price.

Still, with only major material insider buy in weeks, and no word from either the Investment Advisor or the two potential “activist shareholders”, MVC continues to languish.

Not helping MVC’s immediate prospects are an ever weaker stock price for Crius Energy Trust (CRIUF).

Crius Energy was the company which purchased U.S. Gas & Electric from MVC last year for cash, as well as shares in CRIUF, and a debt position in the USGE subsidiary.

If something untoward should happen to Crius, MVC would be greatly affected given the large proportion of the BDC’s investment portfolio which the Canadian company represents.

News Highlights

There were two monumental news stories during the week, but both were expected and barely moved the price of the BDCs involved, let alone the market more generally.

Triangle Capital (TCAP) shareholders threw in the towel and agreed to become Barings, LLC and give up internal management.

Of course, we reviewed the changing of the guard in a snippet in the BDC Daily News column.

Cue The Drums

Even more portentous, Corporate Capital Trust (CCT) merged into FS Investment (FSIC), to create the second largest public BDC.

That’s on the road to becoming the largest BDC when non-traded FS Investment funds get folded in.

Where Did They Come From ?

For KKR – who serves as the External Manager at both CCT and FSIC – this is a rapid elevation to the top of the public BDC heap.

A year ago KKR had no presence in the public BDC world: CCT was non-traded and GSO Blackstone was the sub-advisor to the FS Investment funds.

Master Capital Raiser

Just as impressive – but rarely discussed – is how FS Investments – whose principal skill is in capital raising – has reached the BDC asset management heights ($18bn assets under management).

It’s an even more intriguing and compelling story given that FS Investments has no credit history or experience of its own, relying through its history on brand names asset managers like KKR and Blackstone.

Trouble Making

However, you don’t throw a rock into a pond without causing a ripple effect.

The BDC sector is likely to continue to change dramatically as the existing players – and those outside looking in – consider their next move in reaction to what KKR is doing.

Here are just some of the movers and shakers and what they might get up to:

New On The Block

As we’ve seen TCAP has become Barings BDC., with the ticker BBDC. Check out their new website here.

Standing behind Barings is Massachusetts Mutual Life Insurance, a Goliath of the financial services sector with $305bn of AUM, 1,800 professionals and a global presence.

Based on the moves Barings, LLC has made so far, we have little doubt that BBDC will become one of the largest public entities in this un-announced race to the top.

Barings, LLC is investing $100mn in the former TCAP, an unheard of sum in a sector where the new External Managers spend most of their capital on paying off the former Investment Advisor.

Given the origination network Barings/Mass Mutual enjoy – and their capital resources as well as shareholder approval to take debt to equity to 2:1 – we expect BBDC will be a $2bn+ in assets player before long.

That would place them sixth in the public BDC league tables, listed by asset size.

Question

Will Ares Management – fresh off its apparently successful acquisition of the former Number One BDC American Capital – just sit back when FS Investment/KKR and BBDC grow like topsy ?

Moreover, we expect to see GSO/Blackstone – now divested of its FS Investment straitjacket and working through its non-compete period – longingly look to establishing a presence in the public market.

What will Oaktree Capital do ? Will that other asset management giant continue to manage two separate funds or look to the FS Investment-CCT example and consider a merger ?

Goldman Sachs BDC has already offered shareholders one of the best fee structures around as part of its getting shareholders to approve the higher leverage rules.

(Most other BDCs who’ve asked for shareholder approval to double their risk have given no quid pro quo and still received the blessing they needed).

Goldman has at least two other private BDC funds plying the same waters as GBDC.

Will we see those entities folded into the public group at book value, as is happening without demur at FSIC ?

Another Gorilla In The Room

Then there’s BlackRock (whose website leads out by saying “trusted to manage more money than any other investment firm”.

BlackRock – incredibly – bought another famous asset manager and public BDC sponsor: TCP Capital (TCPC) while already have a BDC of their own.

We doubt that a firm as famously competitive and expansive as BlackRock will be happy to leave TCPC alone, and not seek to grow the franchise that they have spent a small fortune buying.

Our guess is that BKCC will be folded into TCPC, or entrusted to the management of the TCP Capital folk.

An analyst friend of ours says that’s not going to happen and BKCC swears they’ll continue to remain independent.

We’re not so sure, and expect to see some major organizational change at BKCC within a year or two.

Taking Their Time

(The time frames are so long because these asset managers are positioning themselves for the long term, and have to contend with very complex valuation and regulatory considerations which can’t be decided overnight.

Then there’s the long fuse of the Small Business Credit Availability Act, which requires up to a 1 year period between when a BDC Board makes a change and when it becomes effective.

With many BDCs still undecided about which way to jump – although most have their jumping shoes on – just the legal “leveraging up” of the BDC sector will play out into late 2019 and beyond.

Then the actual balance sheets of the BDCs involved have to be restructured and expanded, which means we will have to wait till 2020 for much of the impact in higher assets and greater debt to show up).

Raw Material 

Also feeding the possibility of major changes yet to come in the public BDC sector are several “lost souls” who might be a useful building block for existing stronger players or outside firms.

We’re thinking of under-performing Medley Capital (MCC) with three quarters of a billion of on balance sheet assets.

Troubled or not, MCC would make a great “starter pack” if repackaged, renamed and with a new ticker. We hear advances have been made but the price was not right.

Maybe that will change…

In The Sightlines

Then there’s Alcentra Capital (ABDC), whose sponsor the Bank Of New York sold out its stake last year, and which is also under-performing.

The Stilwell Group – an activist shareholder – is circling the BDC and updated a filing on Friday after the close showing ever more purchases and a bigger stake in the BDC.

Their intentions are clearly spelt out in this extract from the SC/13D Filing:

Our purpose in acquiring shares of Common Stock of the Issuer is to profit from the appreciation in the market price of the shares of Common Stock through asserting shareholder rights. We do not believe the value of the Issuer’s assets is adequately reflected in the current market price of the Issuer’s Common Stock. We hope to work with the Issuer to reduce its share price’s discount to net asset value.

One way to reduce that discount of price to book would be to bring in a new External Manager, in our view. That worked for the Fifth Street/Oaktree Capital BDCs, why not ABDC ?

But who ?

More Besides

Anyway, we could go on because – as always – we keep a list of potential BDC M&A targets and we’ve listed only the biggest ones.

In toto, we count at least 12 BDCs undergoing material organizational change or up for grabs, or more than a quarter of the total.

The news this coming week will be IIQ 2018 earnings, but the bigger – and more important – story is what is happening  in the background as the BDC sector increasingly becomes a playground for the world’s largest asset managers.

Over time that will shift the economics, business strategy, risk profile and shareholder returns in ways that the BDC Reporter and investors can only imagine.

In the very short run – though –  we expect to hear only whisperings from BDC managers – both the prospective fish and the fishermen – in the filings and Conference Calls to come.

Whatever we learn – or think we’ve heard – we’ll bring to our readers attention.

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