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BDC Fixed Income Market Recap: September 2021

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BDC FIXED INCOME

Unmoved

Since the last time the BDC Reporter checked BDC fixed income prices for the month of August (although the closing date was September 3) not much has changed.

By the end of September (cut-off date October 1, as we close on a Friday) the number of public BDC debt issues (26) was unchanged, and the median price not much changed.

That median price dropped to $25.40, from $25.45 at the end of August – a non material difference.

Furthermore – like in the prior month – no BDC issue traded below par.

Top And Bottom

In fact, the lowest priced unsecured debt was one of Great Elm Capital’s (GECC) Baby Bonds – GECCM, with a price of $25.10.

Like last month, investment grade rated Hercules Capital (HTGC) had the highest valued debt issue – ticker HCXY – which closed at $26.86.

A month ago, HCXY was also number one in this category at $26.95.

(HCXY has traded as high as $27.50 in the paqst 52 weeks).

Key Metrics

The average yield of the 26 issues is 5.8%, with 16 issues generating a yield below 6.00%.

The lowest yielding issue is Gladstone Investment’s (GAIN) recently issued Baby Bond with the ticker GAINZ.

That debt yields 4.875% at par, but trades at $26.36, bringing the actual yield if you bought the debt to 4.6235%.

GAINZ has a final maturity of 11/1/2028 but can be redeemed – at the BDC’s option – from 11/1/2023.

All in all – where BDC fixed income prices are concerned – nothing much has changed, either since last month or over the quarter or even the YTD.

As Predicted

However, in September and even as recently as Friday October 1 – much has happened that will drastically change the number of public debt issues in the near future.

In August, the only loss in the BDC Fixed Income universe was of one of Saratoga Investment’s (SAR) Baby Bonds with the ticker SAF.

In September, though, we’ve heard from Gladstone Capital (GLAD); Fidus Investment (FDUS) and OFS Capital (OFS).

The upshot is that 4 existing BDC issues will shortly be redeemed and bring the universe of investable BDC debt to 22, a loss of (15%).

Out Of The Gate

First to announces was GLAD, which indicated that its last remaining public Baby Bond – ticker GLADL – will be called in:

On September 28, 2021, Gladstone Capital Corporation (the “Company”) announced that it will redeem 100% (or $38,812,500 aggregate principal amount) of its outstanding 5.375% Notes due 2024 (the “2024 Notes”) on November 1, 2021 (the “Redemption Date”). The redemption price for the 2024 Notes equals 100% of the $38,812,500 aggregate principal amount of the Notes being redeemed, plus accrued and unpaid interest otherwise payable for then-current quarterly interest period accrued to, but excluding, the Redemption Date. In connection with the redemption, the 2024 Notes will be delisted from the Nasdaq Global Select Market.

GLAD had already issued institutionally placed unsecured debt, maturing in 2026 and with a slightly lower yield, in December 2020 and March 2021.

As a result, the BDC had $130mn in available liquidity as of June 2021, more than enough to pay off the roughly $40mn in principal and interest due on GLADL.

However, we wouldn’t be surprised if GLAD did not tap the unsecured debt market again shortly and raise capital at a sub-5.0% yield.

With the departure of GLADL, the BDC will no longer have any publicly tradeable debt or preferred outstanding.

Next Up

Then came along Fidus Investment (FDUS), which raised $125mn in new unsecured debt this week with a maturity in 2026.

The BDC managed to issue the new institutionally placed capital at a yield of just 3.50%.

That’s much lower than the yield on the two Baby Bonds which FDUS proposes to redeem early with the tickers FDUSG and FDUSZ.

The former was priced at 5.375% and the latter at 6.00%, and both were to be repaid in 2024.

At time of writing, FDUS has formally aqnnounced its intention to redeem FDUSZ on November 2.

No date has yet been set for FDUSG, but that should be close behind.

The two Baby Bonds have a face value of $82mn (FDUS already redeemed $50mn of FDUSZ earlier in 2021).

That will leave subnstantial surplus funds – even after all costs are paid – to temporarily repay advances outstanding under the BDC’s secured revolver.

Benefits

With this transaction FDUS will greatly reduce its cost of unsecured debt borrowing; push out its debt maturity and boost liquidity.

Furthermore – and not strictly speaking related to the subject of BDC fixed income – we have learned from the new debt prospectus encouraging highlights about how the BDC has performed through the IIIQ!:

“On August 10, 2021, the Company invested $14.0 million in first lien debt and $0.3 million in common and preferred equity in Cardback Intermediate, LLC (dba Chargeback Gurus), a leading provider of chargeback prevention and recovery services for eCommerce and Card Not Present businesses.

On August 20, 2021, the Company exited its debt investments in LNG Indy, LLC (dba Kinetrex Energy). The Company received payment in full of $11.0 million on its second lien debt. The Company received a distribution on its equity investment for a realized gain of approximately $4.5 million.

On September 2, 2021, the Company exited its debt and equity investments in Allied 100 Group, Inc. The Company received payment in full of $21.5 million on its subordinated debt investment and realized a gain of approximately $1.8 million on its equity investment.

On September 3, 2021, the Company exited its debt investment in ECM Industries, LLC. The Company received payment in full of $11.6 million on its subordinated debt investment, which includes a prepayment fee.

On September 21, 2021, the Company invested $10.0 million in second lien debt and $0.5 million in common equity in PowerGrid Services Acquisition, LLC, a leading provider of outsourced repair, maintenance, and vegetation management services for electric utility companies”.

These “Recent Developments” probably explain why FDUS – a BDC which is invested in the junior capital of lower middle market companies – has been able to raise unsecured debt on such attractive terms.

Comparisons are odious but we notice that FDUS was able to raise unsecured notes at a yield much lower than a brand name large cap BDC like Apollo Investment (AINV) which recently issued debt of this sort at a 4.5% yield.

Number Three

Finally, OFS Capital (OFS) on October 1, 2021 announced its intention to redeem one of its two remaining public Baby Bonds with the ticker OFSSG.

The debt there was due to mature 9/30/2023 and yields 6.250%.

Instead, OFSSG will be repaid on November 1. Some $25mn in principal is outsanding.

As far as we can tell, OFS will be using availability under its two secured revolvers to repay the Baby Bond.

As of June, OFS had about $150mn of unused revolver borrowing capacity.

The result – if the BDC does not tap the unsecured debt market shortly – is a slight decrease in interest expense from the redemption.

Both revolvers are priced relatively expensively – ranging between 5% and 6%.

Outstanding

When OFSSG leaves the scene, OFS will have only one another public Baby Bond outstanding: OFSSI.

That $53mn of debt – which yields 5.95% – can be called from October 31, 2021.

The BDC Reporter has a rating of LIKELY regarding the chances of OFS redeeming OFSSI in 2021.

Bottom Line

We’ve updated the BDC Fixed Income Table with all the information discussed above, and more.

This shows that the number of BDC public debt issues is set to drop in the next few weeks to 22 from 26, and to 21 if OFFSI gets yanked.

Should OFS redeem all its public junior debt, the number of BDC issuers will drop from 16 to 13.

Looking further ahead, we still expect 5 more existing debt issues to be called in during 2021.

If we’re right that will bring the BDC debt universe down to 17 and the number of issuers to 10.

Of course, that’s just an estimate and the final result on New Year’s Eve could be higher or lower.

How Low Can We Go

Regular readers of this column will know that we’ve been predicting this shrinking of the BDC fixed income world all year.

With three months to go, if we include the latest casualties, the number of unsecured BDC debt issues available to invest in has already dropped in half.

At this point, without any new public issues coming to market, we could see the number of total issues dropping below 10 sometime in 2022.

That would represent greater than a 75% decrease in the choices available since early 2021.

Nonetheless, we shall continue to cover this fast shrinking corner of the debt universe at least through the end of the year.

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