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BDC Fixed Income Market Recap: Week Ended June 28, 2019

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BDC FIXED INCOME

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For another week, BDC Fixed Income prices were at segment highs, while the risk-free rate remained at its low.

The median price of the 43 BDC unsecured debt issues we track closed at $25.57.

That’s basically unchanged from the $25.59 of the week before, and about as high as we’ve gone.

The risk-free rate – in this case the 10 year Treasury – closed at an eerily round 2.000%.

That’s close to a two and a half year low.

What ? Us Worry ?

Yes, that latter rock bottom yield might be the canary in the coal mine of the next recession.

Right now, though, bond investors don’t care and have bid up prices of BDC debt accordingly.

Narrow Range

A few weeks ago, when BDC Fixed Income reached the $25.50 mark (a 2% premium to book), we predicted that there was likely very little further price appreciation to come.

So far, we’ve been right.

BDC debt prices have plateaued at this lofty level for over a month.

Like every week, there are a number of issues trading even at or above $26.00.

This time, there are 4,while the week before there were 3.

At the other end of the list, there are 4 trading below par versus 2 the week before.

Still, most weeks there are 3-4 sub-par issues.

Different

What’s different in this week’s picture is how low the two regular denizens of the sub-$25.00 list have fallen.

We’re talking about Medley Capital’s (MCC) two baby Bonds, with the ticker MCV and MCX.

The BDC Reporter has been commenting on the fate of these two unsecured debt issues for many weeks now.

For the first time, though, we’ve seen a serious slippage in their price levels.

We’ve gone from mild price weakness to something more concerning.

MCX closed at $23.38, off from $24.76.

MCV went even more down to $22.25  from $24.09.

These are major drops in price and represent – most likely – growing investor panic about what is NOT happening at Medley.

Another week has passed with no word from the external manager or the Board, or any of the contenders for the investment advisory contract or the courts or pretty much anyone.

As they say in almost every Western movie: “it’s TOO quiet out there”.

As a result, both Baby Bonds are beginning to trade in distressed territory.

Sanguine-ish

Reassuringly for those still holding their MCC debt, the BDC Reporter is still optimistic that, when this all gets put to bed, no loss of principal or interest will occur.

However, that does not mean there might not be a great deal of financial drama and even lower prices coming up.

We may even see MCV and MCX join the two Medley Management (MDLY) Baby Bonds in the deeply discounted bin, mostly held by speculators.

Those issues: MDLX and MDLQ, continue to trade around $16 a share, over a third below par.

Test Case

Most interesting and important for both MCC debt holders – and all BDC debt investors – the Medley miasma might end up being a first test of how well the indenture protects those who have offered up their capital.

Most readers will know that BDC Baby Bonds offer little in the way of covenants or other protections to debt holders.

However, “little” is not the same as “none”.

Time for MCC debt holders to renew their acquaintance with the initial Prospectus, as we’ve been doing.

Here is a link to the 2013 MCV Prospectus.

We suggest reading pages S 17 to S 25 for a quick reminder of what Medley, and the Trustee for the debt, are contractually bound to do.

As you’ll see – and this applies to many more issues than MCV – there are very few remedies either inside or outside the court system.

Even those remedies that exist take many months to be effective and to be effected.

We are now in the ironic position of having BDC Fixed Income at its highest price levels ever, while simultaneously having to worry – if price points tell us anything – about our first sector unsecured debt default, albeit still months away.

Otherwise…

There was little in the way of other material Fixed Income developments in the week.

The only exception was Prospect Capital’s (PSEC) announcement on June 28 of its intention to tender for the entirety of its 2020 Convertible Notes.

In play are $224mn in notes yielding 4.75%, which PSEC is offering a slight premium (along with accrued interest) to buy back in an offer that remains outstanding till July 27.

This represents a relatively large transaction given that the convertible represents 10% of the BDC’s total borrowings.

As we’ve noted before when discussing PSEC, the BDC does have multiple liability management challenges, with over half a billion dollars of borrowings needing to be repaid in the next 3 years.

Besides the 2020 Convertible, there are $296mn of InterNotes that are reaching maturity.

Possible Outcome

Sounds like the controversial BDC’s CFO will be perpetually busy.

Maybe we’ll see PSEC issue yet another public Baby Bond to join the three (!) already outstanding.

Should that occur PSEC may end up becoming a BDC public debt record issuer with 4 issues outstanding.

The BDC is one of only two BDCs (along with Main Street Capital) to have formally eschewed adopting the higher leverage allowed under the Small Business Credit Availability Act.

Postscript

The BDC Reporter is traveling and won’t be able to update the prices in the BDC Fixed Income Table this week.

By next week, we’ll be back to normal.

We wish all our readers an enjoyable and patriotic Fourth Of July.

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