BDC COMMON STOCKS

Slipping

For a third week in a row, overall BDC common stock prices dropped.

BDCS was off by (0.86%) and the Wells Fargo index we track from a “Total Return” perspective fell by (0.53%).

This is the first three week stretch of red ink the sector has endured since the end of June 2020.

The Wells Fargo index is down a total of (2.4%) in this short period and BDCS (5.5%), but did pay out a quarterly dividend.

Best Guess

As mentioned last week, the BDC Reporter believes much of the sector price slippage can be put down to investor positioning in advance of BDC earnings season.

Ready, Set…

The quarterly flurry of results begins on Tuesday, with six different BDCs slated to report results over the rest of the week.

See the BDC Earnings Calendar for the dates of every BDC’s earnings release (although many have not yet announced) and their attendant conference call.

Included is a link to the BDC’s press release which provides information about how to sign up to listen to the conference call live.

Worthwhile

That’s always an interesting experience, even if those of us on the West Coast have to rise before dawn to attend calls that begin as early as 8:30 a.m. EST, or 5:30 PST.

Many times we’ve watched BDC stock prices move up or down suddenly in the course of a conference call as management makes one revelation or another.

The calls are also useful to listen to – rather than read the transcripts – for the tone that permeates out of both management and analysts, which can be instructive at times.

Of course, most earnings releases are – and will be this quarter – uneventful.

Determining in advance where the fur might fly is well nigh impossible.

Standing By

However, the BDC Reporter will report back as quickly as possible to our readers, with first thoughts summarized on the BDC Data Table.

We’ll provide our quarterly view as to whether the quarter’s results were GOOD, FAIR or POOR, and update the key issues of concern for every BDC: Liquidity, Credit and Dividend.

Shortly thereafter – typically after a look at the quarterly filing and listening to the conference call – we’ll circle back on the BDCs that surprised us, either for the better or worse, with some in-depth analysis.

Task At Hand

Getting back to the Recap:

The number of individual BDC stocks down in price greatly outnumbered those headed up this week: 28 to 18.

In terms of significant moves – 3% up or down – there were three and seven respectively.

Shocker

The most spooktacular (we’re close to Halloween so forgive us) move was by one of the smallest BDCS: Medley Capital (MCC).

For a second week in the row – ignited by the BDC’s sale of its joint venture portfolio recently – MCC was the leading price mover in percentage terms: 7.25%.

Over a 1 month time horizon MCC is also Number One, up 20.0%, according to Seeking Alpha’s invaluable data.

Catalyst

MCC’s momentum was probably boosted by the announcement that the BDC intends to redeem one of its two remaining Baby Bonds -its only debt left – in November.

That’s only a few weeks before the debt’s actual maturity but given that not so long ago debt investors were deeply worried that the debt might not get paid off at all this was encouraging to common stock investors.

Deductive Reasoning

Also intriguing – if you accept the way we’re connecting the dots – on Friday MCC’s sister non-traded BDC – Sierra Income – announced its intention to resume paying a dividend.

According to a filing “The Board recognized the importance of the distribution to shareholders and believes that reinstating the monthly distribution at this time is appropriate“.

Maybe – and here’s the dots are involved – Medley Management – in charge of both BDCs – will take a similar tack with MCC, which might embolden its investors.

We shall find out soon enough, but MCC is one of the BDCs that has not yet set a reporting date.

Downward

Taking a big tumble in price this week – large enough to be worthy of commentary here – was Horizon Technology Finance (HRZN).

The venture-debt BDC was the Biggest Loser, off by (10.5%) and closing at $11.89.

As we’ve mentioned on prior occasions, HRZN has been the golden BDC stock of 2020 and was recently the only issue to be in positive price territory this year versus the end of 2019.

That’s no longer the case: according to SA, HRZN is now off 2019’s level by (7.5%) and (11%) below its recent post pandemic peak set in October 15, 2020 of $13.35.

We blame those “profit takers” as there has been not an iota of new information out of HRZN since October 7.

Still, HRZN is trading at a premium to book value (one of 8 BDCs in this category) and a healthy – albeit not market beating – 9.3x multiple of next year’s projected earnings.

The current yield is 10.0%.

Deja Viewed

HRZN’s price arc in recent months is a very common one where high flying BDC stocks are concerned.

A BDC becomes a popular favorite for one reason or another; momentum builds for awhile and – suddenly – the air comes out of the balloon.

HRZN lost (12.2%) in value in just seven days.

We’d bet, though, that if IIIQ 2020 results are rosy enough and given the recent price plunge, HRZN could yo-yo upward again.

The BDC reports November 3.

News Recap

Our regular readers will know that the BDC sector had a busy week where breaking news was concerned, as even a glance down our new, streamlined, website format will show.

Unexpected – but not market moving – was the acquisition of Crescent Capital BDC’s (CCAP) external manager by Sun Life and WhiteHorse Finance’s (WHF) latest unsecured debt offering.

Regarding the latter, the most surprising part was the low rate the mid-sized BDC was able to garner from its institutional investor.

More on that in the BDC Fixed Income Market Recap shortly.

Never Too Late

Also expected – but which we failed to cover adequately – was the combination of Goldman Sachs BDC (GSBD) with its non-traded sister BDC that occurred October 12.

This had been announced and voted on months ago and complicated by the pandemic but has now been completed.

We will review the new, super-sized GSBD once IVQ 2020 results come through as this merger occurred after the September 30, 2020 close.

In the interim, we point any reader interested to a useful summary published on Seeking Alpha by Ticker Tape Research about the combination.

Moving On Up

Overnight GSBD has doubled in size and vaulted to 7th place in the public BDC portfolio size table.

This is part of a phenomenon we’ve mentioned before: the big are getting bigger in BDC-land. Much bigger.

Furthermore, every indication is that this process will continue.

A Selection

With a fair wind we might soon see the two public FS-KKR BDCs merge (FSK and FSKR) as they always intended to.

Golub Capital (GBDC) has already absorbed one of its non-traded BDCs and is planning similar moves in the future.

Owl Rock, parent of ORCC, is growing like topsy and just received a $1.0bn allocation from CalSTRS for direct lending.

Then there’s that Sun Life/Crescent Capital news.

Responsive

We doubt Ares Capital (ARCC); BlackRock (with two separate public BDCs for no good reason) and even Apollo Global with its underperforming Apollo Investment (AINV) will stand still either.

All the signs point to our shortly seeing the first $20bn public BDC and 8-10 asset managers with AUM over $3.0bn in 2022.

The $1.0bn plus BDCs (20 in total from 17 different asset managers) already account for 85% of all public BDC assets and that could soon go to the 90% plus level shortly.

Tut-Tut

We’re not convinced that this seemingly ineluctable trend is good for shareholders in the BDCs involved or for the health of middle market lending – the sector the Congress was seeking to support by creating the BDC format.

We worry – given that is our self-designated role – that there are not enough “good” financings of the size that these sorts of BDCs require to keep their portfolios filled up.

The risk – which might take years to show up – is the booking of marginal deals from a credit standpoint and a grinding down of spreads in a sector of the market already competing for “product” with CLOs and other direct lending players.

Boring To Some

Finally, there’s the unexciting, but important, issue of corporate governance.

As the BDC behemoths – controlled by even larger investment managers – increasingly dominate the landscape,  accountability to shareholders goes out the window.

There has been some “shareholder activism” in the BDC sector in recent years but not where the bigger groups are concerned.

Who is the “activist” with the deep enough pockets and the gall to take on – let’s say – a BlackRock or an Apollo Global ?

The only recourse dissatisfied shareholders will have is to sell their shares.

Anyway, we’re commenting and not complaining as this state of affairs makes our role as BDC gadfly all the more important.

Coming Up

In the short term, though, we are bracing ourselves for earnings season and which both us and the analysts expect will mostly be a continuation of the positive trends that began in the second quarter after a very tough first quarter of 2020.