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BDC Wrap-Up: Tuesday August 21, 2018

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DAILY NEWS

There was little of note in the SEC filings and press releases of the 46 BDCs we track daily.

The only item added to the Daily News Table was an SEC filing by TCRD seeking further exemptive relief from the SEC.  We sought to give readers some context. Here’s what we wrote:

In fact TCRD and its sister funds run by the same management organization already have “exemptive relief” to invest side-by-side. (This has become a critical feature for all asset managers seeking to stuff single investments into multiple pockets while charging each group full freight). However, THL Credit and its affiliated funds are going back for a broader definition of allowable transactions because some deals were falling through the cracks and were not permissible. This is probably not a market moving story even if the SEC says no – which is unlikely. Just part of a process that will have the unintended consequence – in the BDC Reporter’s opinion – of pushing asset managers like TCRD’s Investment Advisor into larger and larger deals to feed its many funds. Ironically – given that the BDC format was intended to help raise capital for America’s smaller companies – waivers such as this one will have the opposite effect.

FIXED INCOME NEWS

The biggest story of the day is SAR’s announcement of its intention to issue a second Baby Bond. See

Please read the article “Saratoga Investment: To Issue New Baby Bond.”

The BDC Reporter was out with news, analysis and views within a couple of hours after the market open.

Otherwise, we also added a link and a comment about a new PSEC InterNote Prospectus.

FIXED INCOME TABLE

We’ve not yet added either the new GAIN Term Preferred (Series E) or the new SAR Baby Bond to the Fixed Income Table. We are waiting for both to be actively trading.

However, when that occurs, we’ll temporarily see total BDC Fixed Income issues reach 39, from 37 currently.

STOCK WATCH

The UBS Exchange Traded Note with the ticker BDCS – which is based on the Wells Fargo BDC Index – was up 0.88% on the day.

At $20.88, BDCS is spitting distance from the highest level in 2018, which was $20.950 on August 7, 2018.

As readers of the BDC Reporter’s Common Stocks Market Recap will know, we continue to believe the BDC rally – which started up March 1, 2018 – keeps rolling on.

The next possible milestone worth looking out for ?

BDCS at $21.00. That’s a level not reached since November 30, 2017.

One And Only

On the day, the only individual BDC stock up or down 3.0% or more was GECC, up 3.0% to $9.84. At the intra-day high GECC was at $9.93.

Volume was very high at 62,034 shares, 4x the normal average.

Maybe someone is establishing a position or an analyst has given the thumbs up.

Holding Back

The BDC Reporter has a view (and analysis to back up our opinions) on every BDC common stock and debt instrument out there.

For us GECC, with its heavy reliance for investment income on (non-cash) interest income from satellite operator Avanti Communications is too risky.

Admittedly Avanti has received some good news recently: collecting $20mn owed by the Indonesian government.

However, in the bigger scheme of things that’s a drop in the bucket for this ultra-leveraged and thrice restructured publicly traded company which GECC partly controls.

We note the Avanti stock price (see below) has not moved much of anywhere in the last 3 months.

Our suggestion ? Worth a look only for the most speculatively-minded investors.

Only time (a lot of it) will tell if the management team at GECC (which recently lost and then replaced its CFO) will be able to make its unique business model of investing in secondary market debt work.

BDC INVESTOR

Candidly Speaking

We’re having a hard time finding ANYTHING to invest in, partly because of the post March run-up in prices alluded to earlier.

KBW Tip

However, KBW does have a recommendation – as noted by Seeking Alpha today : Oaktree Capital’s OCSL, formerly Fifth Street Finance’s FSC. Here’s the SA summary:

KBW upgrades Oaktree Specialty Lending (OCSL) to outperform from market perform as analyst Ryan Lynch says the stock is trading at a “significant discount” to book value because investors are worried about the legacy Fifth Street Finance portfolio, Bloomberg reports.

Lynch increases price target to $5.75 from $5.50.

The business development company is in transition as it works to rotate out of its extremely stressed FSC portfolio, the KBW note says; although there’s still more work that needs to be done, “we believe the current discount to book value (-16%) provides enough margin of safety.”

As of the open OCSL was already trading at $5.05 and dropped to $4.99 at the close.

Staying Away

For our part – and taking nothing away from Mr Lynch at KBW –  we’re not buying OCSL for a number of reasons.

First, the new Investment Advisor – nearly one year after taking over from Fifth Street – has not been able to perform any credit miracles.

Many assets have been bought and sold and there has been much discussion of core and non-core assets.

However, the list of troubled investments we identified several quarters ago remains largely unchanged except for loans written off.

This quarter a new non accrual loan was added, in a case of “one step forward, two steps back”.

Comes Down To Price

Second – unlike KBW – we look more at the recurring earnings of the BDC – and the outlook thereof – when deciding if a BDC is “over valued ” or “under valued”.

In this case, OCSL trades at a 12.0x multiple of the most recent Net Investment Income ($5.05/$0.40) at a time when the BDC is close to a fully invested state.

At KBW’s $5.75 price, the pro forma multiple would be $14.4x.

That’s a multiple more appropriate for a MAIN than an OCSL, especially given the latter’s continuing credit problems and still transitioning business strategy.

In a nutshell that’s just too high a price to pay for a work-in-process turnaround.

We prefer a lower multiple if we’re going to take credit and strategy risk (8X ? 10X ?).

Nonetheless – given the dearth of interesting opportunities out there and the sense of promise associated with the OakTree Capital brand a $5.75 price is not impossible, but we’ll stick to the sidelines.

Take Comfort

Thankfully we hold OCSL/FSC’s Baby Bonds (now with tickers  OCSLL and OFSE), both of which have been stable price-wise throughout the BDC’s troubled times and should be eventually paid off with no problem.

 

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