BDC Common Stocks Market Recap: Week Ended June 29, 2018Premium Free
BDC COMMON STOCKS
As a group, the BDC Sector is going nowhere…fast.
For yet another week, the key price indicator we use to guide us – the UBS Exchange Traded Note with the ticker BDCS – was just a few cents off the week before.
BDCS closed at $20.31, down from $20.37.
BDC prices have been stuck in a holding pattern for 5 weeks as illustrated by this BDCS chart dating back to the third week of May:
On The One Hand
If the BDC rally is taking a break, it’s a long one.
Still, according to several metrics we track, this week was slightly better than last week.
Let us count the ways:
14 of the 46 BDCs we track were up in price versus 11 last week.
Of those 3 were up in price more than 3.0%, while last week no one broke that arbitrary barrier.
(By far the Biggest Winner was Saratoga Investment, or SAR, which continued a multi-week ascent for which there is no obvious explanation by jumping 14.0%.
Also up were Newtek Business (NEWT) and Oaktree Strategic Income (OCSI), up 4.0% and 3.9% respectively).
We also like to look at how many BDCs are trading within 5% of their 52 Week Highs or Lows to judge market enthusiasm.
Last week there were 9 BDCs scraping the bottom. This week: 8.
Conversely, last week only 3 BDCs were within 5% of their top price, this week there are 6.
On The Other
With that said, there are other metrics which are less encouraging.
Once again there were several BDCs down (3.0%) or more in price.
Last week there were 5. This week there were 7.
Here are the tickers: BKCC, MVC, CCT, SCM,GECC, ABDC, and CGBD.
For what it’s worth, all the week’s Sad Seven are also down in price over a 4 week period.
Moreover, the number of BDCs whose price is above their 50 Day Moving Average continues to drop from 27 last week to 21.
The 200 Day Moving Average does not improve the picture.
The number of BDCs trading above that level are down to 15 from 17.
So what’s happening here ? Or, more specifically, what’s NOT happening here ?
Certainly, the BDC Reporter gets the impression that the sector is not getting any more bump from the Small Business Credit Availability Act.
This week, Ares Capital (ARCC) announced its intention to adopt the new leverage allowance, but added a self imposed limit and a modest fee concession.
(So modest a fee concession that the stock price of ARCC was unaffected by the news. You could almost hear investors yawning, as this chart shows).
Keeping A List
We’re keeping a list of how many BDCs have signed up for the new leverage allowance.
15 have received Board approval and 4 have been blessed by shareholders (ARCC- for example – has chosen not to ask its owners their opinion).
Another 9 are in process of getting approval from shareholders.
That’s a sizable number, and there are more likely to follow.
Yet the market has barely moved – if at all – in response.
Investors may be powerless against the managers of BDCs and their enthusiasm for growing portfolios by hiking leverage in the final innings of this cycle but they have not drunk the Kool Aid.
That may change when some BDCs that have adopted the new rules boost earnings and even distribution levels in 2019 thanks to the additional firepower.
The BDC Reporter has repeatedly shown that the way the economics works that we may see an early boost in Net Investment Income Per Share.
Looking Around The Corner
Almost as certain, though, is that inevitable credit losses and higher cost of debt to purchase assets as funds reach their target limits will subsequently winnow away those gains.
When we get a major, industry-wide credit reversal (we’re coming on 10 years, folks) some BDCs are likely to see earnings and book value drop more than if they’d left the Act alone.
That’s just our view and hard to prove many quarters in advance of a hypothetical recession.
However, here’s a little more quantitative analysis drawn from our research which you are unlikely to find anywhere else and which speaks to the seismic change in the industry going on.
As detailed above by our count, there are 28 BDCs that have approved the higher leverage rules or are in the process of doing so.
(Frankly we don’t expect any push-back from the majority of shareholders who also give most BDCs that ask annual blank cheques to sell equity below NAV as well).
To date, we’ve estimated – based on managerial comments and using common sense assumptions – that these 28 BDCs will add $13.581 billion of new assets, all financed by increasing debt borrowings.
There are another 18 BDCs still on the fence (many of them on the phone daily to S&P to ensure their investment grade rating does not get pulled).
If and when those fence sitters adopt the higher leverage – and there are several multi-billion dollar BDCs involved including FS Investments, Corporate Capital Trust, TPG Specialty, etc.- expect that number to double.
(FSIC- by itself- if it decided to target debt to equity of 1.5x would increase assets/debt by $1.7bn…).
Yet, despite this coming tsunami wave of additional BDC investment power shareholders are only very modestly enthused, if at all.
Maybe the markets are rational or maybe there’s a delayed response coming, which could be positive or negative.
Have no doubt, though, that the balance sheet of the BDC Sector in 2020 will look very different than the numbers at March 31, 2018, the last quarter before the implementation of the Act.
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