BDC Daily Update: Tuesday November 16, 2021Premium Free
According to Yahoo Finance “better-than-expected economic data, with retail sales growing by the most since March in October, and strong earnings” resulted in all the major indices once again moving up in unison.
Likewise as IIIQ 2021 earnings season slouched toward its end, the BDC sector’s price level rose again, but ever so slightly: (0.1%). BIZD – the Van Eck sponsored exchange traded fund that holds most BDC stocks and which we use as a price guide – closed at $17.53, but did get up to $17.58.
Of the now-45 BDCs we track 21 were up in price, 22 were down and 2 were unchanged. Far and away the biggest percentage price gainer was Monroe Capital (MRCC): up 6.2% on trading volume nearly 8x normal. Perhaps investors have convinced themselves that MRCC has achieved its promised turnaround ? The stock reached $11.68 at one point today, just off its 52 week high of $11.71, but closed at $11.44. There was no news.
Also up in price – and for more obvious reasons – was Gladstone Capital (GLAD). The price increased 4.6%. As we’ll discuss below, the mid-sized BDC confirmed what had been previously estimated: a huge increase in its NAV Per Share.
Also in the news – and down (6.7%) was Crescent Capital (CCAP). As we review below, the BDC announced a fully underwritten secondary stock offering, and its price got punished. CCAP closed at $19.00. We’d guess that we’ll see a gradual increase back towards its 52 week high of $21.49 before too long.
Two BDCs reached a new 52 week high, and from the same asset manager: GLAD and Gladstone Investment (GAIN).
As mentioned, GLAD has officially reported its fiscal year end results through September 30, 2021. The BDC had already previewed some of its key metrics so the numbers were no great surprise. We read the earnings release and conference call transcript (no questions from analysts !) and glanced at the 10-K.
The most notable item is the huge increase in net unrealized appreciation achieved in the quarter: $26mn. That caused NAV Per Share to jump 8.9% in the IIIQ 2021 over the prior period, which is – far and away – the best performance in this category of any BDC. Furthermore, compared to the NAV Per Share just before the pandemic, GLAD is up 15%. That’s the second highest gain over the 7 quarters involved of the now-45 BDCs we track, beaten out – surprisingly – by Prospect Capital (PSEC).
At a time when some pundits – painting with too broad a brush – are arguing that the day of the smaller-sized BDCs (GLAD has AUM of just over half a billion dollars) is past, and the future lies with the mega-billion BDCs run by even larger asset managers, this is a telling rebuttal. GLAD focuses on the lower middle market (LMM) which has proven an auspicious hunting ground – both in terms of debt and equity investments for the BDC for 17 years. Nor is GLAD alone, as there are several other sub-$1.0bn BDCs registering excellent results in the post-pandemic period.
For GLAD, half the unrealized gain this quarter came from one portfolio company – Lignetics. (By the way, the portfolio company was sold in November and those unrealized gains on the books at the end of September were realized. GLAD has booked $16.6mn in equity gains and $1.6mn in fees that will show up in the end of 2021 results). Encouragingly, though, GLAD can point to several other portfolio company equity investments rising in value which might – to varying degrees – go the way of Lignetics down the road. This gives us confidence to project – with the general market environment still very constructive – that GLAD’s NAV Per Share growth should continue.
Also forging ahead in the IIIQ 2021 with good results, higher NAV Per Share and (yet another) dividend increase is Oaktree Specialty Lending (OCSL). In fact – as management is quick to point out on its conference call (and rightly so) – the distribution is up 63% from its pre-pandemic level and includes six increases in a row. NAV Per Share is up 10% since IVQ 2019, almost in line with GLAD, and one of 19 BDCs that can make that claim. (We’re not including the newest BDC additions in this statement). Not surprisingly OCSL’s stock price reached $7.57 intra-day, equal to its 52 week high set just before results were announced. At that high, OCSL is trading at 12.2x its most recent distribution annualized. The analyst earnings consensus for FY 2022 is $0.61, which seems low given the most recent results.
What sets OCSL apart from most other BDCs – and may result in higher EPS going forward – is that the BDC is making a concerted effort to boost its portfolio yield by taking on presumably riskier and/or more complex transactions. For the fiscal year, the average portfolio yield has jumped from 8.3% to 8.7%. This quarter, the average yield on new deals was 8.6%. At the same time – and very much like is going on elsewhere – by a series of capital market measures, the BDC was able to reduce its cost of borrowing from 2.7% to 2.4%.
With all this success, and with debt to equity very close to the BDC’s 1.0:1.0 target, we have to wonder whether OCSL may tap the equity market in a secondary. If that happens, a new Baby Bond issue might also be in the cards. The last time OCSL raised unsecured debt the yield was only 2.7% after all.
Yesterday, we added Blackstone‘s newest BDC to our coverage universe. Today, it’s the turn of venture debt, internally managed Trinity Investments (TRIN), which IPOed in February. Much more recently Runway Growth Finance – also in venture debt – came public, with the ticker RWAY. All these new BDCs – and any more we’ve missed but learn about – will be added to our data tables in the next few days. We’re now up to 45 public BDCs in the BDC Reporter’s coverage universe.
Back To The Well
Staying with the theme of equity issuance – and just one day after Stellus Capital (SCM) pulled its own secondary stock offering – Crescent Capital (CCAP) issued 2.5mn new shares at a price of $21.33, raising over $50mn after expenses. The BDC recently released IIIQ 2021 earnings that indicated NAV Per Share was $21.16. CCAP has traded as high as $21.48 in the past 52 weeks. This news, though, seemed to have caught the market flat footed and caused the stock price to drop nearly (4%) to as low as $18.41, but rallied as the day went on.
With both the unsecured debt and equity markets in a very generous mood, more and more BDCs – SCM’s experience notwithstanding – are taking advantage of the opportunity to raise capital on excellent terms. This includes multiple At The Market share issuance programs that have been going strong all year and are resulting in more shares being issued. Ironically, the latest BDC to sign on – in this case with KBW – is SCM itself today.
We’ve just updated the BDC Fixed Income Table, with the newest addition: PhenixFIN’s (PFX) latest $50mn Baby Bond, with the ticker PFXNZ. The debt has begun trading on the NASDAQ so we’ve formally added the details to the table. Interestingly, the optional redemption period is short (two years), while the final maturity is long-ish (7 years). The debt is rated BBB by Egan-Jones. Otherwise, the Baby Bond is much like all its BDC predecessors.
As we noted yesterday, the proceeds from the offering are being used to partially redeem the BDC’s only other debt outstanding: the Baby Bond with the ticker PFXNL.
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