BDC COMMON STOCKS

Week Twenty One

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After last week’s drop in BDC stock prices, we wrote “This is a good time for long term investors to sharpen their pencils and start looking for some bargains”.

At the time, 28 BDCs out of 44 were trading within 5% of their 52 week lows and another 7 were within 5% – 10%.

In just a fortnight, BDCZ – the UBS Exchange Traded Note which owns most BDC stocks and which we use to measure price performance – had dropped (8.66%) and what had been a pullback that began in early April was becoming “a rout”.

Long story short, BDC investors – and across all markets – took our advice and went bargain shopping in the last few days.

Up, Up And Away

In just 5 days, BDCZ increased 6.2% in price, the highest weekly gain since November 2020.

The S&P BDC Index – using the “total return” calculation – was up 6.6% – also way above normal percentage price moves for this sector.

Something For (Almost )Everyone

42 BDCs increased in price, the sort of number you might expect in a strong rally.

However, even more telling is that 36 BDCs went up by 3.0% or more. The last time that happened was back in February 2021.

Clearly, this was a “buying opportunity” almost across the board for those who chose to participate.

As a result, the number of BDCs trading within 5% of their 52 week lows has dropped to 4 from 28 as a rising tide lifted most every boat.

Excluded

The only BDCs left behind were two of the smallest and most troubled:

Great Elm Capital (GECC) fell (0.4%) this week and non-dividend paying Logan Ridge Finance (LRFC) dropped (4.2%).

Robust Increases

By contrast, the large cap BDCs (AUM over $1.0bn) were much in demand with institutional and retail investors, led by market leader Ares Capital (ARCC), which increased 9.8%.

That other behemoth – Owl Rock Capital (ORCC) – moved up 7.9% and FS KKR Capital by 6.9%.

The venture debt BDCs – of which there are several represented in our coverage universe – were also popular.

Two recently public venture debt players – Runway Growth Finance (RWAY) and Trinity Capital (TRIN) led the percentage price increase leaderboard with increases of 11.5% and 10.3% respectively.

All Done ?

Spectacular as the week’s price changes were, the metrics show that the BDC sector is still some way from being fully recovered from the weeks of downward drift that preceded this bounce back.

Most tellingly, no BDC trades within 5% of its 52 week high and only 10 within 5% – 10%.

By contrast, in the week ending on April Fool’s Day 2022 there were 16 BDCs within 5% of their 52 week high, and 17 in the 5%-10% group.

BDCZ remains (9.2%) behind its price on April 1 and even (2.4%) in May month-to-date, with one more trading day left in the month.

Look Back

Comparing prices over the last 30 days, there are still many more BDCs that have registered a loss in value (36) than a gain (8).

On a 2022 year-to-date basis the picture is a little better, but not much. Only 9 BDCs have eked out a price increase this year and 35 have not.

Hard Hit

Some of the price drops remain substantial, this week’s increases notwithstanding. We count 14 BDCs – nearly a third of the universe – with a 2022 loss in price of (10.00%) or more, based on Seeking Alpha data.

As you might expect, GECC has not fared well – down (32%).

Also high on the leaderboard of YTD loss, though, is Blackstone Secured Lending (BXSL) – one of the biggest players out there, but still off (26%).

Out of favor after being an investor darling through the pandemic is venture-debt BDC Horizon Technology Finance (HRZN), down (23%).

Other well known names on this 2022 list are Capital Southwest (CSWC), which reported good results for its fiscal year and quarter this week and SLR Investment (SLRC), fresh off merging with its sister BDC a few weeks ago and Newtek Business Services (NEWT), which at one time traded at the highest premium to book of any BDC.

Better. Not Best.

Yes, the number of BDCs trading at or above net book value per share did go up this week to 15 from 13, but that metric remains below the 20 we counted back in April.

One Time Thing ?

For BDC sector watchers it’s hard to determine if this week’s price surge was just a matter of bringing value back into balance after overshooting in prior weeks as the markets were gripped in fear.

After all, all the major indices went on a tear this week, with the S&P 500 – by way of example – up 6.6%.

Will the rally be sustained, or will prices take another leg down before long, leaving the price heights of April further and further away ?

One Swallow Does Not Make A Summer

Markets do not go straight down but edge their way down a cliff.

By way of illustration, here is the stock price chart of Ares Capital during the Euro-crisis of 2011, as investors reacted to every new development differently but a general malaise developed that this might translate into a financial system crisis and find its way back to the BDC sector.

In the five months shown here, ARCC’s stock price dropped more than (20%) overall, but there were many up days along the way.

All’s Well That Ends Well

Thankfully, the Europeans patched together a solution; the global financial system did not collapse and ARCC was unaffected.

Within a year from its lowest point in September 2011, ARCC regained all its lost value.

The Question Everyone Is Asking Themselves

In our case, was this week a turning point that augurs a revival in BDC prices, or a false dawn before further downward jags ?

So Far Away

The problem is that the much anticipated recession which is causing so much unease to BDC prices is – probably – a year or more away.

Even for markets that are always peering into the future, we’re not going to get a clear signal any time soon as to what is coming down the pike. (By contrast, the 2011 European crisis – though seemingly interminable at the time – was resolved in a relatively brief period and without leaving much in the way of permanent damage).

Still Staring Into The Abyss

Nothing much that happened this week materially changed the likelihood that in 2023 the U.S. economy will be contracting; a good deal more companies defaulting on their debt and financial conditions will be strained.

We’d be surprised if the market – at this point – has discounted the likelihood of a recession after weeks of doing the opposite.

Which does not mean that BDC prices – which as we’ve seen remain battered, if only somewhat less so – could not continue to rally in the short run.

Not A Believer

Less likely, though, is that we’ve seen the lowest lows of this cycle.