BDC COMMON STOCKS

Week 2

Plot Twist

Through Wednesday January 12, 2022 the BDC sector was on an upward tilt.

At the highest point, BIZD – the Van Eck sponsored exchange traded fund we use to track the sector’s performance – was up 4.5% in what little of 2022 had already occurred.

Measured from December 20, 2021 when this latest surge in BDC prices began, the gain was more than twice that.

This was in line with the BDC Reporter’s view that the sector had new price heights to reach even after a most excellent 2021.

New 52 week price records were made on January 11 and January 12.

A similar – though not identical storyline – was playing out in the major indices as well.

On Thursday, though, investors had a change of heart about the latest prospects for 2022: inflation, high rates, potentially lower earnings etc.

All the major indices flagged, even though the NASDAQ, S&P 500 and Russell 2000 perked up just before the Friday close.

BIZD dropped (2.2%) between its high on Wednesday (which was also a 52 week peak) and the close on Friday.

For the week, though, BIZD was slightly up in price: 0.6%.

Micro Analysis

Notwithstanding the markets change of direction, 23 BDCs were up in price on the week and 22 down.

There were only 2 BDCs which increased more than 3.0% in price over the period and 2 that dropped more than (3.0%).

The two positive performers were Hercules Capital (HTGC), which moved up 3.52% and SLR Senior Investment (SUNS), up 3.29%.

Merging

We don’t have much explanation for the SUNS move except that investors are positioning themselves in advance of the merger with sister BDC SLR Investment Corp in which the smaller BDC will be gobbled up.

SUNS trades at a (6%) discount to net book value and SLRC (7%).

The coming merger will be undertaken using both BDCs then net book value so we expect some synchronicity between the valuations of the two BDCs.

Back At The Well

HTGC was in the news on Friday – and not yet covered by the BDC Reporter in our Daily Updates – for issuing $350mn of unsecured notes over a 5 year maturity.

The interest rate HTGC will be paying is 3.375%.

That’s obviously a “good” rate that will continue to chip away at the venture debt BDC’s relatively high cost of borrowing: 4.9% as of the IIIQ 2021.

The funds will repay $230mn in Convertible Notes coming due in February and costing 4.375%, making the new funding immediately accretive in IQ 2022.

A Notch Higher

For the record, though, this debt raise is at a yield higher than what HTGC was able to arrange before. Back on September 16, 2021, the BDC issued $325.0 million of 2.625% interest-bearing unsecured notes due September 16, 2026.

This underscores a point we made during the week about all the unsecured debt raised this year (see ARCC, FSK ,SLRC and SAR).

All 4 BDCs – and now HTGC – tapped the unsecured debt markets on favorable terms and for material amounts BUT none were able to match the record low yields achieved in prior periods.

Clearly, debt investors are requiring a higher rate of return given all that worry about inflation and the seemingly inevitable rise in the risk free rate that lies ahead.

This does not mean that the Great Refinancing – where BDCs of all sizes swapped out more expensive unsecured debt for materially cheaper alternatives – is over. There are plenty of more expensive debt issues sitting on most BDCs balance sheets to be refinanced, but the gains are narrowing as medium term rates rise.

We expect to be tracking this trend all year – and beyond – until we reach some sort of crossover point where unsecured debt costs begin to rise again.

However, that’s still some time off and we won’t be losing any sleep on the subject any time soon.

For The Record

By the way, the two biggest losers in percentage price terms were Gladstone Investment (GAIN) and First Eagle Alternative Credit (FCRD) – two very different BDCs in terms of historical performance and investor appetite.

The former dropped (3.96%) and the latter (3.43%).

We can’t point to any specific development that might have triggered those price changes.

Back To The Metrics

Despite the weaker end to the week, most of the numbers we look at every week to take the sector’s temperature were not much affected.

The number of BDCs trading at or above book dropped slightly from 18 to 17.

The number of BDCs trading within 5% of their 52 week highs – after jumping up sharply intra-week – fell back to the same number : 12.

Month To Date

We’re only two weeks into January and the direction of the sector is not clear.

Still, the BDC Wilshire Index – using a total return calculation – remains 2.1% up overall and 0.71% this week.

BIZD is only (2.2%) off that recently set new 52 week high.

Looking Good

Moreover, what incomplete previews we’ve heard from ARCC, HTGC, HRZN, GBDC, MAIN about one or other aspect of their business suggests mostly good news coming regarding IVQ 2021 performance.

Nothing that we can see in the road up ahead suggests the BDC sector will drop out of the relatively narrow price range we’ve been in since the end of May 2021, as this BIZD chart shows:

Optimistic

In fact, the BDC Reporter continues to believe an upward tilt to BDC prices remains the most likely way forward.

This past week 4 BDCs reached new 52 week heights and ARCC – as discussed on these pages – successfully raised new equity capital at a robust premium to par.

Notwithstanding the price drop at the end of the week, we believe that we’ll have more good news than bad to report on in the weeks ahead.