BDC COMMON STOCKS

Straight Talk

This was a very bad, no good,  week where BDC prices were concerned.

We saw the biggest percentage drop in BDCS, and in the Wells Fargo Scorecard Weighted BDC Index, since March-April.

Of course, the major indices were hardly doing well either as our readers will know.

The S&P 500 dropped by (5.6%).

This was the same index that was flying high as recently as October 12 and was at a 2020 peak on September 2, 2020.

No Use

The fact that six BDCs reported results which were rated GOOD or FAIR by the BDC Reporter did not help support pricing.

For example,  Ares Capital (ARCC) announced earnings slightly above the analyst consensus and an unchanged dividend but still saw its stock price drop (2.7%) thereafter.

See the BDC Reporter’s First Look for ARCC and all the other BDCs that released numbers from Tuesday on.

The BDC Performance Table provides a useful, continually updated, summary of key results and the BDC Reporter’s evaluation of long term outlook to compare against your own. 

Black List

Let’s illustrate how bad a week the BDC sector had with some familiar metrics:

BDCS dropped (4.6%) and the Wells Fargo Index (5.6%).

Of the now 45 BDCs we track (sayonara to Garrison Capital this week), 41 dropped in price and only 4 managed to show a gain.

Just that metric of ups and downs is the worst we’ve seen since March.

Of the 41 BDCs in the red, 28 were (3.0%) or more down, of which two were off by greater than (10%).

Other Numbers

Less spectacularly, the number of BDCs trading at book value or higher fell from 8 to 7.

Despite the big drops at many BDCs, there is only one trading close to its 52 week low price.

That is Capitala Finance (CPTA), which reached a low price of $8.40 during the last 5 days.

Under Control

All in all – as long time BDC watchers – this looks like an orderly retreat in advance of the Presidential election, compounded by a worsening pandemic.

Put the two together – and despite decent fundamentals in the BDC sector – and you’ve got the greatest downward volatility in seven months.

It’s Always Something

BDC investors have just enjoyed an unusually long spell of relative price calm.

You can be sure where BDC investing is concerned that the narrow range in which the sector has traded could not last too much longer.

This leaves BDCS down by (35.4%) YTD and the Wells Fargo Index down by (23.4%) on a “total return” basis.

Obviously things could get much worse if we get a contested election or Covid-19 spirals out of control across most of the country.

At the same time, we also remember that there was a dip in stock prices just before the election last time, followed by a rally when the balloting was done.

There is no sense of panic yet, either from the BDCs themselves or from investors as there was in March.

As we’ll show when discussing the BDC Fixed Income segment, prices are as stable there as they were for the first few weeks of the late February-March meltdown.

Impact

Another freak out is possible, but – at the moment – we don’t see that translating into much change to BDC fundamentals.

LIBOR has already been sent down as far as it can go, and most every BDC has “floors” in place now in any case.

Liquidity has been bolstered at most players in recent months in the wake of the first round of troubles and credit conditions have stabilized.

We’d be very surprised if there was any significant change in earnings or dividend levels at BDCs even if we get several weeks of uncertainty, whether political or medical.

At Greatest Risk

The most likely to be impacted are some of the weaker BDCs whose future as independent entities has been in question for some time.

Even those most vulnerable BDCs, though,  generally no longer rely on outside debt funding except for unsecured debt that does not come due till 2022 or beyond.

In any case – even as more and more BDCs report results – the sector is likely to be moved around by greater forces that have nothing to do with whether reported Net Investment Income Per Share was 1 cent above or below consensus.

Backdrops like these are very common and BDC investors have learned to grin and bear it.

Most of the time these “crises” last only  few days or weeks but can – as with the European uncertainties in 2011- go on for months.

We don’t pretend to have a sense of what we’re about to get.

This too, though, shall pass.