BDC COMMON STOCKS

Week 50

No Christmas Cheer

You can blame omicron or the changing Fed policies, but there’s no doubt market conditions are darkening. Fast.

The S&P 500 was down (1.9%) this week but the BDC sector – as measured by BDCZ – was off (2.9%).

That’s the worst weekly drop for BDCZ on a non-dividend paying week since June.

Only 3 BDCs were in the black over the last 5 market days, and 42 were down.

Furthermore – and even more worrying – 24 BDCs were down (3.0%) or more.

Double Digits

This included 3 BDCs that dropped greater than (10%) !

Leading the pack – as we’ve been chronicling all week – was Cion Investment (CION).

The newly public BDC was off (12.5%) and closed at $12.05, less than a dollar per share from its 52 week high.

Frustratingly for long term shareholders of the stock CION was at its post-public high of $15.09 as recently as December 8.

Since then CION has lost 20% of its market capitalization.

Newtek Business (NEWT) was down (11.9%).

We’re used to big swings in what has become – for some – a speculative stock.

This week’s move, though, is partly due to the BDC’s huge dividend having been paid ($1.05).

NEWT is down ($3.66) between Fridays.

The other BDC taking a hit of (10.6%) is SLR Investment Corp (SLRC) whose principal sin in the eyes of the market seems to be preparing to absorb its smaller sister BDC SUNS.

In a few days SLRC has lost all the price gains of 2021 and currently trades only up 0.23% YTD.

Still, SLRC is still not “cheap” by price to projected earnings (PE) standards, clocking in at 11.0x.

Ever Fewer

Also melting away faster than a polar ice cap are the number of BDCs trading within 5% of their 52 week highs.

In early November there were 29 BDCs in this august category.

Now there are just 5.

Perspective

All the above notwithstanding, the BDC sector – as measured by BDCZ – is only down (1.4%) in the month of December to date.

There are still 17 BDCs trading at or above net book value.

YTD, BDCZ is up 18.7% and the Wilshire BDC index is up 23.6% on a total return basis.

Beginning, Middle Or End ?

The problem – as you can imagine – is that the tremors that are shaking up the markets do not seem to be over.

We can readily see investors spending the week-end reading omicron headline stories and rushing back on Monday to close out positions out of an abundance of caution.

Business As Usual

In the background, though, the day-to-day business of leveraged finance will continue with pundits already predicting yet another record year for M&A and buyouts; stratospheric multiples and all the ingredients we’ve known through 2021.

Undeniably some BDC borrowers will be affected by the depredations of omicron and many others will see further impact on supply chain issues; employment costs and the like.

However, it’s fair to say that most companies – despite much hand wringing about difficult conditions when asked – are benefiting from these strange times.

We’ve seen EBITDA – but also sales – at companies of all sizes increasing by record percentages and to new absolute dollar highs.

If sponsors and lenders carried the less fortunate companies through the initial Covid-19 period, we doubt that they’re going to cut and run now. At least not till the full impact of the new variant can be assessed.

Code Orange

Nonetheless, some BDC investors are clearly beginning to sweat and a panic is not inconceivable.

Last time (February 2020) we stared down the barrel of the pandemic, BDCZ fell (55%) in a month’s time.

By this year, essentially all that loss (99%) was recovered, but there was much hair pulling and sleepless nights for investors in between.

Listen

For those BDC investors who can take the heat and the uncertainty involved, opportunity might be knocking.

As we’ve said many times, this is a sector where many investors tend to shoot first and ask questions later.

That’s partly because the majority of BDC shareholders are individual investors, some of whom are famously responsive to news headlines.

It’s also partly because estimating credit losses that might occur as a result of a crisis like this one is very difficult, and some investors would rather watch from the sidelines to see how their favorite BDCs fare.

Dark Days

As a result, we’ve had 5 major pullbacks in BDC prices in the last decade as investors fled in advance of huge losses that never came about.

(The worst period in actuality was from July 2014 till February 2016 when lower oil prices did result in credit losses at the many BDCs who had – foolishly in our minds – gotten on the lending to energy companies bandwagon).

Get Your Eggnog And Pull Up A Chair

We’ll have to see in the days and weeks ahead if we get another episode of BDC investor doubt.

The stock prices will tell the story, as will any sudden deterioration in the price of BDC Baby Bonds, which to date have been unaffected by what is happening to their common stock cousins.

Although many of us are distracted by the season – including the BDC Reporter writing these words from a hotel room in London – keeping a close eye on the markets in the next couple of weeks is recommended.