BDC Preview: Week Of November 19 – November 23, 2018 – UPDATEDPremium Free
November 23, 2018: As Thanksgiving week has drawn to a close, the BDC Reporter thought to update our BDC Preview, where we project what might happen, with a brief summary of how matters actually turned out. Generally speaking, developments met our expectations but there are enough surprises in this comparing and contrasting to make for interesting reading. The updates are in italics and bolded for ease of reading.
Original Intro: The BDC Reporter is kicking off a new series for all readers: BDC Preview. Our goal is to provide a heads up at the beginning of every week of what lie ahead for anyone interested in the Business Development Company sector. For our Premium Subscribers, we hope this weekly reminder will dovetail with our ongoing stream of “news, views and analysis” about the most salient stories of the day. For our Free Subscribers – many of whom may not follow the BDC on a daily basis – we hope to provide advance warning of what to expect in the short term this ever expanding sector (46 public companies trading on all the main exchanges and 41 traded Fixed Income issues). This is Week Four.
Whence The BDC Rally ? : Last week, the two week long BDC rally ground to a halt. Based on the Wells Fargo BDC Index for the period, the sector pulled back (2.2%). Only 9 individual BDC companies were up in price or flat, while 37 were down. Using the UBS Exchange Traded Note which invests in most every common stock in the sector – ticker BDCS – we dropped to (6.6%) down in price terms on a year-to date basis.
It’s hard to imagine a huge turnaround coming this week, what with the broad markets all in various stages of disarray. In addition, the general leveraged loan market – a kissing cousin of the BDC sector – is just coming off its lowest price point in two years, and knocking their total return to below 4%. (The Wells Fargo Index measured comparable return for BDCs is a very close 2.8%). Then there’s the Thanksgiving break coming up with many investors more focused on turkey and family. We expect a non-eventful to lower shade on BDC prices.
When that’s over there will be just 5 weeks to year end, so the chances of the BDC sector even breaking even on a price basis are looking slimmer and slimmer only a few weeks after a multi-month rally pushed BDCS 1.3% over the 2017 level and promised a total return for the year approaching 10%.
Update: There was much sound and fury in the three and a half days of the Thankgiving-shortened week. After all, the S&P 500 managed to drop a whopping (3.8%) on the week, as Apple (AAPL) and other did a swan dive. The BDC sector, though, largely disconnected themselves from the dramatics going on in the larger indices. At the end of the week, things turned out pretty much as we imagined. BDCS dropped $0.10 to $19.29 from $19.39, a (0.5%) drop. Still, another week slides by and the chances of BDCS getting into the green in 2018 seems ever more remote.
We’re Watching You: In this vein, we expect that there may be more Stock Watch articles this week. That’s when a BDC stock hits a new 52 Week or multi year low and we write a hot-off-the-presses article with the news, analysis of the damage done and some hypothesis – when we feel we know – as to why. We were kept busy last week by Monroe Capital (MRCC) and Garrison Capital (GARS) both receiving that un-enviable coverage. THL Credit (TCRD) has also hit an all-time low and so has FS Investment (FSIC). All 4 remain candidates for further Stock Watch attention.
The problem is even bigger than those 4. We count 7 other BDCs trading within 5% of their 52 Week Lows. As investors already know, a BDC stock can easily move several points downwards on very little news. Last week – super thinly traded OHA Investment (OHAI) was sometimes moving over 5% up or down a session. Not to be a downer, but there are another 13 BDCs with prices 5%-10% off their lows. In total, that’s 24 BDCs, or just over half in the 52 week basement.
Update: Sadly, we were almost universally correct with MRCC, GARS, and FSIC down further on the week from their prior Friday close. Only TCRD managed to eke out an upward move: 0.1%. Moreover, Carlyle’s TCG BDC *CGBD) hit a new all-time low, which we discussed in a Premium Stock Watch article. That’s a very complicated story. Overall, there are 25 BDCs whose stock price is 0%-10% off their 52 week low, one more than last week.
Exception To The Rule: And yet. This week Horizon Technology (HRZN) hit a new 52 week high of $11.99 on Thursday November 15. HRZN closed out the week – after paying out one of its $0.10 monthly distributions – at $11.62, just behind book value per share of $11.66. The technology venture lender is at a two year high. Why ? IIIQ 2018 results were better than expected and what seemed like a distribution likely to be cut now seems much more solid. HRZN yields 9.3%. Will that price surge (13.2% since October 25) continue into this week. We doubt it, expecting profit taking to kick in.
Update: By mid-week, our prediction/projection that HRZN might drop in price as investors take profits was very much validated by events. The stock dropped as low as $10.83. That’s a (10%) drop in what must seem the blink of an eye to shareholders. However, the stock then started to bounce back and ended at $11.77, less than 2% off that high. So, we were both right and wrong !
Welcome Wagon: We’ll also be looking out for what’s happening to the stock price of the latest public BDC to come to market: Bain Specialty Finance (BCSF), which joined the community on Thursday at $20.05 a share. Here’s a link to the website. The stock price closed the week at $18.50. The float on the new stock is limited because Bain did not sell many shares. That might keep the stock price up for awhile. We’ve reviewed the new entrant’s Prospectus which is very middle of the road. The BDC has about $1.5bn in assets and is paying a $0.41 ($1.64 annual) dividend. Bain is charging the new standard Management Fee for larger BDCs: 1.5%. Like most everyone else BCSF intends to take advantage of the Small Business Credit Availability Act and will be leveraging up shortly. So even as investors are becoming familiar with the BDC it will be transforming. We have an open mind about BCSF but are in no hurry to add to any of our portfolios. It’s not particularly inexpensive and we still have plenty of questions following our reading of the Prospectus. BDCs are best seen – in our view – as long term investments so there’s little earned by rushing in when one has only a partial picture.
Update: Not much happened to BCSF in its first full week as a public company. Volume of shares traded settled down, dropping to only 62,000 the day after Thanksgiving, but that be misleading. The stock price closed at $18.55, or just 5 cents over the week before. There was no new developments and now we settle in till the first quarterly reporting as a public company, still months off.
Fixed Income Scene: Given the holiday we don’t expect much in the way of capital markets activity. The exception might be Great Elm (GECC) which has been circling around a third Baby Bond offering for weeks. Maybe this week there’ll be a completed offering. We might also see the latest Baby Bond issued – White Horse Finance’s (WHF) debt with the ticker WHFBZ – actually start to trade in the public markets. Finally, KCAP Financial’s (KAP) Baby Bond is only days from being called. Scheduled date: November 26,
Update: This is easy. Nothing happened. KAP continues to be slated to be redeemed on November 26.
Earnings Season: As far as we can tell there is no BDC reporting results this week. Next week we get annual reports from 3 companies and on December 4, Medley Capital (MCC) closes out earnings season with their release.
Update: No earnings and little in the way of filings or press releases. However, Apollo Investment did announce changes to its financing which set up the recovering BDC to take full advantage of the Small Business Credit Availability Act. We wrote a long analytical piece just before Thanksgiving about the subject and what the result might be for risk and return at AINV.Already a Member? Log In
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