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BDC Daily Update: Monday November 15, 2021

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MARKETS

Major Indices: Monday November 15, 2021

As shown above, the markets went nowhere on Monday as the leading indices (except for the Russell 2000) barely budged. The BDC sector, though, fell more sharply. BIZD – the Van Eck sponsored exchange traded fund which owns most BDC stocks – fell (0.6%) to $17.52.

Only 11 BDCs increased in price, 3 were unchanged and 29 were down. (Note that we’ve increased the size of our BDC universe with the addition of a new BDC sponsored by Blackstone– more details below).

Still, 2 BDCs managed to reach new heights, suggesting that there’s life in the BDC rally even yet. Horizon Technology Finance (HRZN) jumped substantially to $19.08 from $17.95 at its prior peak. That’s a 6.2% jump from high to high, and all the more surprising given the absence of any new development that we could find. Also moving higher – and not surprisingly given recent results – was Gladstone Investment (GAIN), which reached $16.72.

For the record, at the close, HRZN and GAIN are trading at 59% and 25% premiums to net book value per share.

NEWS

The most surprising item of the day is that Stellus Capital (SCM) announced its decision to end its secondary. The BDC – as we’ve reported previously – was going to issue new shares after reporting good earnings for the IIIQ 2021. Given that the BDC has been performing well and its GAAP debt to equity is pushing up towards 2:1 (regulatory leverage is lower), raising equity made sense. Why the investment bankers and the BDC were not able to deliver is unclear. This is embarrassing for the manager, but probably no great disaster. In any case, SCM has had some success in the past issuing new shares through an At The Market (“ATM”) program. Maybe the advisor will fund capital growth in the short term in that manner.

On the earnings front, we heard for the first time from Cion Investment Corporation (CION). The newly public BDC released its earnings and held its first conference call. Sadly for investors interested in knowing more about CION only one analyst had any questions.

The results for the period were generally positive. Net Investment Income Per Share increased to $0.35 from $0.33 in the IIQ 2021. The NAV Per Share was up 1.1% and is now only (2.2%) off the pre-pandemic level. A dividend of $0.28 was announced for the IQ 2021, and a promise of two extra “special” dividends every year was made. Credit quality – especially as judged by the non accrual level – remained in good shape. The percentage of the portfolio underperforming was on the high side – as was the case previously – at 15% of the total (excluding short term investments), but still within what we’d characterize as a generally “safe” zone.

Just 1 loan was added to the non-accrual list in the IIIQ 2021. This was the second lien debt of Premiere Global Services (PGi), which had a cost of $3.4mn and is now valued at zero. Income forgone is under $400K a year.

On the conference call we heard that CION has been given permission to join in with Apollo on new transactions, as with any other institution. Previously management had thought the SEC might oppose any Apollo deals because of its passive ownership stake in CION. Whether this new latitude makes any material difference to deal flow going forward remains to be seen.

We’ll be undertaking a full fledged review of CION down the road, including taking our first hard look at portfolio credit quality name by name.

Speaking of credit performance, the BDC Reporter published an in-depth review of Apollo Investment (AINV), in association with our sister publication the BDC Credit Reporter. Our main take-away is that while AINV has numerous underperforming companies in its increasingly diversified and repositioned portfolio, most of the damage to the BDC’s net book value has been done. Income may, in fact, increase as some long standing troubled names get sold and the proceeds reinvested into yielding instruments. As always with AINV – which has been turning itself around for the longest time – the question is as much when as how much.

Two weeks late, we’ve noted that Blackstone Secured Lending Fund (BSLX) has been launched as a public BDC. The new entrant sold 9.2mn shares for $26.15 on October 27. On November 12, the newest BDC – sorry CION – reported IIIQ 2021 results. More on those results in a future edition of the BDC Daily Update. We’ll also be adding BSLX’s metrics to the BDC: NAV Change Table and BDC Credit Table.

On the BDC Fixed Income front, we heard today from PhenixFIN (PFX) that $55mn of its $75mn Baby Bond with the ticker PFXNL will be redeemed December 16, 2021. We’re a little surprised that the BDC’s internal managers did not use cash on the balance sheet to completely pay off PFXNL. The BDC raised $50mn ($57.5mn if the underwriters over-allotment occurs) from a new Baby Bond issue, with the intended tickers of PFXNZ. That Baby Bond is still trading in the “grey market” and not yet included – as a result – in the BDC Fixed Income Table.

Also redeemed is PennantPark’s (PNNT) Baby Bond with the ticker PNNTG. The BDC raised $165mn at a yield of 4.0% to replace PNNTG’s 2024 5.5% yield debt. While PFX continues to have public debt, PNNT is off the list of public issuers. There are now only 14 BDCs with publicly traded debt outstanding.

CREDIT

Over at the BDC Credit Reporter, we wrote two updates today. The only one relating to a public BDC was about Carlson Travel, which filed for Chapter 11 a few days ago. Reflective of the strange times in which we’re living, this does not seem likely to cause a loss for the only public BDC with exposure: Barings BDC. For the full story see the BDC Credit Reporter article.

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