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BDC Preview: Week Of December 3 – December 7, 2018

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Back In Sync: As we expected, in the week ended November 30, 2018 the BDC common stock and the broader indices adjusted to get more in sync. The major markets raced ahead, while the BDC sector – which had performed better the week before – followed behind, up 0.62% in price terms. As this 2018 year-to-date chart comparing BDCS to the Dow Jones, NASDAQ and the S&P 500 shows all four have followed a similar shape even if there are short term divergences. If you adjust for the fact that the BDC sector pays out much higher distributions, even the total return is highly similar.

Of course, we don’t know if the markets will zig or zag this week (although news out of the G-20 regarding the tariff war may provide an early adrenaline boost), but we expect the correlation with the major indices to continue.

Last Gasp: At long last, BDC earnings season will be coming to an end with the release on Tuesday December 4, 2018 of Medley Capital’s (MCC) earnings before the open, with a Conference Call to occur the same day. This is going to be an important release for the BDC – less because of what the results might be – but as an update in advance of the planned merger with two related Medley companies. We already know the dividend MCC will be paying in the fourth quarter (an unchanged $0.10) but not much else. Shareholders were promised a Proxy relating to the merger at the time of the last earnings release on August 9th, which has still not landed with a thud on their doorsteps. As is standard, the BDC has had very little to say about the upcoming merger. However, those of us who read the filings know MCC terminated its Revolver back in September and sought exemptive relief  to allow the various Medley entities to invest together in November. Investors will learn more on December 4, but we expect the devilish details to remain obscured till the Proxy comes out. MCC had indicated this transaction would be completed in the IVQ of 2018 or IQ 2019. The latter time frame seems the likely one.

The earnings release cannot come at a better time for MCC shareholders. When the unusual three way merger was announced back in August the stock price jumped from around $3.40 to over $4.00 a share. As this chart shows, though, investor skepticism/fear has set in in subsequent weeks and the price has slumped back almost to its starting point. Maybe all the excitement about a new start for the BDC, with a new ticker, new balance (but same old management team ) will revive the stock price ?

We did learn one more salient – if minor – fact late on Friday November 30 while poking around in MCC’s filings. The BDC announced its intention to redeem $12mn of its 2023 Baby Bond with the ticker MCV. Total outstandings are reportedly $90mn. The planned redemption date is December 31, 2018. This suggests that MCC’s portfolio size continues to shrink, generating surplus cash that is being used to pay-off a debt obligation costing 6.125%. We wonder if this is just the first unsecured debt shoe to drop, and whether the rest of MCV – which can be prepaid at any time – may follow in the months ahead. At the close on Friday MCV was trading at $24.50, and has been as low as $24.16. FYI, that other MCC Baby Bond, with the ticker MCX, can be prepaid should the BDC desires from the beginning of February 2019 on. The final maturity is January 2021 so MCC/Sierra will have to address that debt’s future role pretty soon as well.

Decision Time: As we pre-previewed last week, FS Investment (FSIC) and Corporate Capital Trust (CCT) will be finally holding their respective shareholder votes regarding their merger, with the former being the planned surviving entity. There is little suspense about the outcome of the vote, only about whether the two BDCs will be able to ensure enough shareholders vote. All week both BDCs have been issuing reminders to their shareholders to vote their Proxy by mail, phone or computer. We expect that if a quorum is not achieved an extension will occur and the calls to action will continue. Once CCT is gone, the total number of BDCs – although not the dollars involved – will drop from 46 to 45. CCT will join American Capital Senior Floating (ACSF) and Triangle Capital (TCAP) in the year’s R.I.P section.

Stocks To Watch; We will continue to track how the latest public BDC – Bain Capital’s BCSF– trades. BCSF came to market at $20.05 but after all costs ended up trading last week at $18.41. The Board has approved adoption of the lower asset coverage rule allowed under the Small Business Credit Availability Act (SBCAA) and shareholders will get a chance to opine in February. Whether that will help or hurt the stock price is anybody’s guess. For our part, we’ve learned it’s better to get to know a BDC better before jumping in with both feet, illustrious sponsor notwithstanding. BCSF will be on our watch list for some time.

The BDC Reporter tracks which BDCs are trading within 5% of their 52 Week Low, as well as in the  5-10% range and the same for the 52 Week Highs. As of November 30, the number in the most worrying category: 0%-5% of the 52 Week Low was up to 14. (That jumps to 25 when one includes the 5%-10% group). We can’t name them all here but are surprised that Barings BDC (BBDC) – which replaced Triangle Capital in the nick of time and with generous terms for former shareholders – continues to trade in the basement. Last week BBDC managed to hit a new 52 Week Low of $9.82 before closing out the week at $10.02. This occurred even as the parent of the Investment Advisor continues to buy up shares seemingly every day. Apparently insider buying is only a Buy signal some of the time and does not seem to have helped BBDC much at all. There’s no catalyst for change this week, but we’ll be watching.

We’re also surprised that Solar Senior Capital (SUNS) continues to trade at or near a low. In the last two years SUNS has traded as high as $18.31 but – like Icarus – has tumbled down to reach $15.60. That’s a (15%) tumble for a BDC whose dividend has been unchanged since 2012 and whose boob value per share has changed nary at all over the last several quarters. Yet SUNS is trading just 1.0% off its 52 Week Low and close to a 2 year nadir. Again, with no catalyst in sight, we are mostly expecting to watch and wonder.

Should be an interesting week.

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