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BDC Common Stocks Market Recap: Week Ended July 6, 2018

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BDC COMMON STOCKS

Brief

Given this was a holiday shortened, this will be a briefer than usual Market Recap.

Which investors were left in the market were in a jolly mood, lifting BDCS to $20.49, up from $20.31 the week before, or 0.9%.

That’s the highest level reached for a week’s end close since June 8, 2018.

(Admittedly BDCS is reaching towards a quarterly dividend record date, which may have boosted the stock price.

However, the BDC Wells Fargo Index was up 1.7% on the week).

High Points

The BDC Rally – which had been wilting for several weeks – revived, with intra-day and intra-week BDCS prices reaching levels not seen since January.

From it’s lowest point on March 1 of this year to the highest intra-week level reached intra-day on Friday BDCS is up 7.9%.

Plus…

On the week, only 6 BDCs dropped in price, leaving 40 up or flat.

An equally impressive 7 BDCs amongst that group of 40 were up 3.0% or more in price.

Weekly Winner

Goldman Sachs BDC (GSBD) was the Number One Favorite, up 5.4% on the week and 4.2% over 4 weeks.

Note to most other BDCs: It seems that cutting one’s management fee helps the stock price.

Still, GSBD is still below its level of a year ago and has traded 18% higher in the past.

Not So Bad

Of the half dozen BDCs down in price on the week, none reached our (3.0%) threshold…

Also encouraging for BDC Bulls: Two-thirds of BDCs (30) are trading at levels above their 50 Day Moving Average.

That’s up from 21 last week, and leapfrogs the 27 of two weeks ago.

Lower Lows

Another bright spot is that the number of BDCs trading within 5% of their 52 Week Low has dropped to 4 from 8 the week before.

The stock to watch to the downside is MVC Capital (MVC), which was both the Biggest Loser in the period but also hit a new 52 Week Low.

The activist shareholders circling the stock will have noticed.

Last week we only had 3 BDCs trading within 5% of their 52 Week High.

In 3.5 business days that number has turned into 7.

Not Usual

We note the presence of a BDC not accustomed to being in this group: Oxford Square Capital (OXSQ), 4% off its high.

Highlight

The only notable news item during the week – and one we covered in a roundabout way in an article about S&P and GSBD and Apollo Investment, was Stellus Capital’s (SCM) decision to “leverage up”.

Shareholders – a flexible bunch – agreed to both allowing SCM to reduce asset coverage of debt to 150% AND issue stock below NAV if the “independent” members of the Board see fit.

So far the prospect of a much larger investment portfolio – fully funded with debt- has not been a propellant for the stock.

As the chart below which compares SCM’s price Year To Date versus BDCS shows, there’s been no undue shareholder enthusiasm.

The chart shows SCM’s price movement in 2018 has closely mirrored the sector as a whole.

Maybe the absence of any reduction in fees being charged under the new higher leverage regime and worries about an upcoming increase in credit risk have kept the punters away.

Or maybe investors are at the beach and will return later to boost up SCM’s price more than the sector.

Coming Attractions

During the week, more and more BDCs began to alert shareholders to the time and date of their second quarter 2018 earnings releases.

The BDC Reporter has been inputting the release dates and Conference Call data into our under-known Earnings Calendar, featured in our Investment Tools section.

From the first announcements, the first week of August will begin the onslaught of reporting.

Going Swimmingly

We’re guessing that with the exception of the Usual BDC Suspects results should look pretty good as many macro factors are providing a headwind.

There have been very few reported new credit trouble spots.

We do keep a list of hundreds of BDC portfolio companies which we check every day.

Anecdotally, we’ve been surprised at how few new under-performing borrowers have been popping up.

That’s probably because capital is in abundant supply which tends to reduce the number of borrowers – even those with major problems – who resort to defaults and restructuring.

Moreover, ever higher oil prices continue to help that formerly moribund industry and the many BDC investments therein.

Lower middle market BDCs – especially those who’ve been accumulating equity stakes in their borrowers – are harvesting some of the gains that have ensued.

Then there’s the short term benefit of LIBOR rates increasing, boosting investment income (only partly offset by higher borrowing costs).

Gut Feeling

Our guess is that investors might pay up for many BDC stocks in advance of the results, causing the market to rise in the weeks ahead.

(However, those BDCs still wrestling with credit troubles may still see investors pulling back due to an abundance of caution as has been the pattern in recent periods).

As we get closer to August – and all those filings – the BDC rally could shift into a higher gear.

We’ll circle back in August and see how that turned out.

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