BDC COMMON STOCKS

Week 45

Almost Done

BDC earnings season is all but over – with 37 BDCs having already checked in with their IIIQ 2021 results.

We heard from multiple players during the week, but there were no great surprises.

As Ordered

In fact – as a glance at the BDC: NAV Change Table should suggest – the entire earnings season has gone pretty much as planned.

Maybe the growth in NAV Per Share was a little more anemic than we might have expected, and there were a few more non accruals than we might have expected, but these are but details.

Mostly BDCs have continued to perform well; announce unchanged or increased distributions; pile on ever more inexpensive unsecured debt and look forward to next year – whether fiscal or calendar.

Consensus

We updated all the BDCs earning estimates for 2021 and 2022 as of Friday, leaving out Portman Ridge (PTMN) which does not have any projections on Yahoo Finance and Newtek Business (NEWT), which is on its way out of the BDC circle.

We found that the analysts expect a 0.1% average increase in EPS, with 24 expected to book increases in recurring earnings, 6 to be unchanged and 9 declines.

Regarding the declines, all but 2 are expected to fall (5%) or less.

Like A Rock

Maybe more impressive than BDCs maintaining or increasing their earnings in the year ahead is the overall stability, with very few investment disasters to point to.

No wonder YTD, of the 42 BDCs we track overall, only 1 has dropped in price (Great Elm – GECC- and only by -3%).

28 BDCs are trading within 5% of their 52 week highs, including 7 who broke that record this week alone.

36 BDCs are trading within 10% of their 52 week high, which is just as instructive.

Some higher book values reported during the week have reduced the number of BDCs trading above net book value.

Still, there are 16 in that popular category.

Highest Heights

Overall, the sector – measured by BDCZ (the UBS sponsored Exchange Traded Note which owns most BDC stocks) closed at $20.12, less than (1%) below its 52 week high set in June.

YTD, BDCZ is up 24%.

The BDC Wilshire Index which calculates a total return indicates that the sector is just slightly off its highest level EVER.

On a YTD basis, the Wilshire Index is up an impressive 38.3%, eclipsed only by the 52 week result of 54.5%.

Rarely Again

This is a performance that might not be replicated for a generation – and like this one – requires a calamitous preceding fall in market prices.

2022 cannot hope to match what 2021 has achieved, but will we have a reversion to the mean (aka a sharp drop in prices) or a plateau, whether sloped slightly up or down ?

Our View

Looking to the metrics as we do every week for answers to this question, the BDC Reporter continues to favor the latter as being the most likely.

Yes, the increase in inflation has made the steady-eddy earnings and distributions of BDC stocks (and bonds) nominally a little less valuable.

However, the BDC sector is – currently – a very safe place to be where expectations about earnings and credit losses are concerned, which is valuable to the majority of investors that eschew uncertainty.

We may or may not get another upward push in BDC prices to a new BDCZ record in 2022 (BIZD – the Van Eck exchange traded fund that also owns most BDC stocks and which we also use to measure sector performance – did squeeze out a 0.2% higher price over the prior top level this week), but a correction of -10% or more seems highly unlikely.

For that to happen, BDCZ would have to return to the level of March of this year.

Everything Is Relative

Barring some new factor that we’ve not identified, we get the impression that any price weakness would attract investors on the sidelines, happy to pick up the 8% plus yield BDC investments are paying on average.

After all, the “risk-free” 5 year Treasury yield remains only 1.2% and the yield on BKLN – the ETF of large cap senior leverage loans is just 3.1% and HYG – the “junk bond” ETF – is paying out 3.8%.

This is good news for long term BDC investors who know that most of their income over time will come from distributions. They can continue to “clip coupons” for the foreseeable future with a good prospect that there’ll be no price drama as faced in 2008-2009, 2011, 2013, 2016, 2018 or 2020.

We may look back in the not-so distant future and laugh at our optimism, but that’s the current outlook with 45 weeks of 2020 in the rear view mirror and 17 months into this gigantic rally.