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BDC Market Update: Monday November 8, 2021

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MARKETS

Yahoo Finance: Major Indices November 8, 2021

For the eighth day in a row the S&P 500 reached a new 52 week high. The other indices kept roaring up as well, as the numbers above show. Yahoo Finance explains these nose bleed levels for the major indices can be explained by “an extended wave of optimism” by investors caused by better than expected corporate earnings.

BDC investors with a historic bent will remember this as the day that BIZD – the Van Eck-sponsored exchange traded fund that owns most BDC stocks and which we use to measure sector price performance – reached a new 52 week high. BIZD pushed up to $17.74 intra-day, $0.04 above the prior 52 week level and closed at $17.72. As our readers will know this was a long time coming despite the fever pitch conditions in the broader markets. BDCZ – the UBS Exchange Traded Note which also owns most BDC stocks and which we also use as a guide to what’s happening to the sector – rose, but not enough to break its own 52 week record high. BDCZ got all the way up to $120.26, $0.03 off the $20.29 highest level set in June.

24 BDCs increased in price, 3 were unchanged and 15 were in the red on the day. Apparently some investors had been worrying about Prospect Capital’s (PSEC) performance because that BDC led the pack in terms of percentage price increase with a 5.0% gain after reporting decent IIIQ 2021 results. Also up was Monroe Capital (MRCC) by 3.55%. The mid-sized BDC that has faced credit challenges has been moving up since IIIQ results were announced, although NAV Per Share moved up only 0.8%. As with PSEC, investors seem to have been positioning themselves for something worse than they got and have pushed up the price post-earnings release. PSEC and MRCC are trading (5.2%) and (10.4%) off their 52 week highs. Otherwise, no individual BDC stock moved all that much price-wise today.

No less than 6 BDCs,though, reached new 52 week highs on Monday. Overall, 27 BDCs are trading within 5% of that top price and 7 between 5%-10%. Only 7 BDCs are more than 10% away from their 1 year apogee. With those sort of numbers – as we’ve said before – it’s hard to see the BDC sector not finding a way to reach new sector price levels for both BIZD and BDCZ.

NEWS

As mentioned, we heard from PSEC, which managed to achieve Net Investment Income Per Share (NIIPS) of $0.21, above both the prior quarter and analyst expectations. Reassuring to many shareholders, PSEC is more than “covering” the $0.18 quarterly dividend in place since September 2017 with its recurring earnings. NAV Per Share increased 3.2%, well above the current sector average of 1.4% this quarter over last. That all sounds good, but we’ve not yet undertaken a deep dive.

However, we were able to confirm by reviewing the 10-Q that PSEC only has 2 material non-accruing portfolio companies –USES Corp and United Sporting Goods. Both have been troubled for some time and only account – at remaining FMV – for 0.5% of the portfolio as a whole. We have to remember, though, that PSEC “controls” 47% of its portfolio assets at FMV and has great latitude in deciding what is non performing and what not.

In non-earnings news, we heard late in the day that strangely named, non dividend paying, internally managed PhenixFIN (PFX) proposes to refinance “a portion” of its only remaining unsecured Baby Bond – ticker PFXNL – with a new unsecured debt issue. PFXNL matures in 2023 and yields 6.125%. The new debt will have a ticker of PFXNZ and will last till 2028. Pricing and early redemption date and other details are not yet set, but will shortly require us to once again edit the BDC Fixed Income Table.

Given that PFX is in the market for new debt, disclosures have to be made as IIIQ 2021 results have not yet been made available. Here’s what we learned from the debt prospectus about PFX:

Recent Developments

Investment Portfolio

Subsequent to the three months ended June 30, 2021 through November 5, 2021, we invested $63.9 million in 15 new or existing portfolio companies and received $82.7 million in repayment or sales proceeds.

On November 3, 2021, the Company’s investments in JFL-NGS Partners, LLC and JFL-WCS Partners, LLC, were exchanged for cash proceeds of $24,892,158 and an equity position of approximately $10 million in the combined entity JFL-NGS-WCS Partners, LLC.

Share Repurchases

Subsequent to the three months ended June 30, 2021 through November 5, 2021, the Company repurchased 141,700 shares of common stock at an average price of $41.63 per share under its share repurchase program.

Preliminary Estimates of Certain Financial Information

As of the date of this prospectus supplement, the Company preliminarily estimates that its net asset value per share as of September 30, 2021 was between $56.85 and $57.20 per share. Also as of the date of this prospectus supplement, the Company preliminarily estimates that its net investment income for the quarter ended September 30, 2021 was between $0.25 and $0.45 per share.

PhenixFIN Filing: November 8, 2021

We were surprised by the level of new loan activity reported. Net-net, though, the PFX portfolio size seems to have shrunk: probably to $160mn-$165mn. Cash, which was at $53mn in mid-year could be around $60mn. That’s probably some of the source of the repayment of the PFXNL notes, which have a total balance of $78mn.

There must be a whole story that we’ll never have explained about what’s happening at JFl-NGS and JFL-WCS Partners. All we know is that the two investments were valued at $43.5mn, all in the form of equity, as of June 2021. (This was sometimes dividend paying equity, as PFX received a hefty distribution of $10.3mn in November 2020). Now, these two entities have been turned into cash proceeds of $25mn, plus $10mn remaining in equity. Obviously that’s less than expected but does allow PFX to have $25mn in immediately liquid funds. We can’t tell with this sparsity of data whether this is – relatively speaking – good news or bad news but might account for why PFX’s NAV Per share seems to have dropped slightly in the IIIQ versus the IIQ, despite the small buyback instituted.

Despite this preview in the prospectus, much still needs to be learned from PFX’s IIIQ 2021 earnings release to determine if the BDC is moving backwards, forwards or is stuck in neutral. How much the BDC is able to raise on this new unsecured note and at what yield may tell us – indirectly – about the market’s view. By the way, using the mid-point of the IIIQ 2021 NAV Per Share estimate, PFX is trading at a (26%) discount to book.

Also reporting after the close was FS-KKR Capital (FSK). We’ve not had time to do much but glance at the results, which seemed positive. Adjusted NIIPS were down, but management had guided us on the last quarter to expect this letdown after merging with FSKR. NAV Per Share was up by 1.1% and leverage remains well below the target level.

Most notable was that FSK announced a quarterly dividend of $0.62. That was lower than $0.65 in the prior quarter, but that was also explained away as a one-time thing. Prior to that FSK’s regular distribution was stuck at $0.60 since the pandemic caused a cut from $0.76. At long last, FSK has good news to announce in the dividend department. Already in the after-hours market the stock price was perking up by 3% as we write this. After all, the BDC’s stock price has been trading at only 8.3x projected 2021 EPS, based on fear of an imminent dividend cut. FSK has confounded some pundits and this may cause a market price re-assessment. We’ll be curious to see what Tuesday brings.

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