MARKETS

Probably not very surprisingly, with inflation just reported to be at a 31 year high, investors of all ilks took a moment to reconsider their expectations for the future. The result – after many days of rising prices – was an across the board pullback, as the chart above illustrates.

The BDC sector fell in price as well, but not by much. BIZD – the Van Eck-sponsored exchange traded fund which owns most BDC stocks – dropped (0.1%) to $17.56. with the new 52 week high at $17.64, this was not much of a retreat. Meanwhile, BDCZ – the UBS Exchange Traded Note with much the same BDC ownership – fell (0.2%), slightly off the June 2021 high of $20.29.

28 BDCs moved down in price, 4 were unchanged and 10 moved up in price on the day. There were no major individual price movers, but Cion Investment (CION) – which had been moving up in advance of its first earnings season and reached $12.990 on November 4, dropped again, ending at $12.22. That’s a (6%) fall in a few days, half of which occurred today.

Yesterday’s huge loser, Newtek Business (NEWT) stabilized, up $0.01 to $29.03 and still at a 79% premium to net book value per share !

Overall, BDC investors are not sure if inflation is a GOOD THING or a BAD THING from their standpoint, so we don’t necessarily expect any sustained negative impact from the increasing worries about inflation. (That wasn’t the case in the ten year bond market, where the price increased 8.9% overnight). Given that BDCs principally lend on a floating rate basis (presumably to rise in the future) and mostly benefit from having much of their debt obligations already fixed at very low rates, there is no reason to panic for BDC investors. However, some will worry that inflation will cause some portfolio borrowers not to be able to adapt, and credit losses to increase. So far, there’s been very little evidence of this phenomenon, but that might not stop some from worrying.

NEWS

We’ve already written two articles about recent news developments: the new Baby Bond issue at PhenixFIN (PFX) and a new revolver for Hercules Capital (HTGC). Liability management may not be a very glamorous subject but is very important over the long term. In both these cases – and for two very different BDCs – the impact should be positive.

After the close, Crescent Capital (CCAP) reported IIIQ 2021 results. Overall, the metrics were favorable – much in line with the quarter as a whole. Net Investment Income Per Share was up, so was NAV Per Share (up 0.9%) and the size of the portfolio. Like many BDCs CCAP stuck to its regular distribution of $0.41, but threw in a “special” of $0.05 at the year end. For all of 2021, the total payout was $1.69, up from $1.64 in each of the two prior years.

Credit performance remained in the GOOD zone (under 15% of the portfolio), with $122mn of underperformers (including $12mn on non accrual), or 10.7% of the total portfolio. CCAP’s conference call is scheduled for Thursday, but we don’t expect any great revelations. Still, like most of its peers, CCAP is hardly inexpensive for new investors. At a closing price of $20.02, the BDC is trading at 12.1x its 2022 projected earnings; 11.8x the 2021 distributions and a (5%) discount to NAV Per Share. Can the BDC increase 7.3% to meet or beat its 52 week high price ?

CREDIT

“Funds managed by Apollo Global Management entered into a definitive agreement to acquire Global IID Holdco, LLC and its subsidiaries, including 1A Smart Start, LLC , a global provider of alcohol monitoring solutions“. 

SW Financial Institute 11/9/2021 Article

This probably means that $35mn in first and second lien loans due in 2027 and 2028, owed to 8 different BDCs are likely to be repaid shortly. Pricing ranges from LIBOR + 450bps to LIBOR + 850 bps. “Floors” are also involved, raising the real yield.

The public BDCs involved include Barings BDC (BBDC); Portman Ridge Financial (PTMN), and First Eagle Alternative Credit (FCRD). Most of the BDC lenders only arrived on the scene in IIQ 2021.

PTMN – which has already reported IIIQ 2021 results – has valued its first lien debt at a 12% premium, suggesting pre-payment fees of some sort are expected. The other lenders involved should also eligible for any fees involved.