BDC COMMON STOCKS

Week 38

Contrary

We take it as a given that any time we profess upbeat sentiments about the longer term prospects for the BDC sector the short term reaction of the market is to drop.

In any case, that’s what has just happened after last week’s Recap where we waxed optimistic that “the BDC sector could find its way to new heights before long.”

We were referring to the ever improving earnings and dividend outlook for most of the 43 BDCs we track as the main catalyst for that rosy scenario.

Brooding

However, this week investors sentiment turned dark again, with the weak earnings out of Fedex and its warning of a coming “global recession” being the cherry on the cake of a bad week for stock prices.

The S&P 500 fell (4.77%) and the NASDAQ managed to drop (5%) in a single day at one point.

To add insult to injury, bond prices continued to fall as yields rose across the spectrum, with the most attention going to the 2 year Treasuries, which reached their highest level since 2007.

Part And Parcel

Not surprisingly – despite moving up in the prior week – the BDC sector got caught up in the hand wringing drama.

BDCZ – the UBS exchange traded note which owns most BDC stocks and serves as one of our sectoral price guides – fell to $17.72 -a (2.85%) drop).

The S&P BDC Index – calculated on a total return basis and with a slightly different set of holdings – fell (2.65%).

Swap

In an almost identical reversal of the week before – when investors were in a buoyant mode – only 6 BDCs saw their prices stay the same or increase and 37 were in the red.

The week before, 38 BDCs were flat or up and only 5 were down.

In a similar fashion, this week only 1 BDC managed to increase by 3.0% or more, but 9 dropped by (3.0%) plus.

In Week 37, the corresponding numbers were 9 up and 1 down.

Trending Down

Over the last month only 5 BDCs have managed to record a price increase – according to Seeking Alpha data.

Going by the 50 day and 200 day moving averages – apparently much favored by some investors – only 12 BDCs are in the black by the former and 3 by the latter.

Year-to-date, there are only 4 BDCs that can boast a higher price now than as of December 31, 2021.

Looking at the BDCZ chart, the BDC sector has given up any price gain achieved since July 27, seven weeks ago.

BDCZ still sits, though, 7.5% above the lowest point of this miserable year – $16.48 on June 16, 2022.

Conceivable

Knowing how markets work – and being realistic about the unusually high degree of uncertainty out there – there’s no ruling out that the BDC sector – and the markets generally – might “re-test” their June 2022 lows.

(This week “legendary investor” Stanley Druckenmiller – ignoring two world wars and much else besides, claimed “that this is the most difficult time in history to make economic forecasts“, and was not contradicted).

We’re beginning to see some of the signs that accompanied the last BDC sell-off .

This week, 4 BDCs reached a new 52 week low.

Furthermore, the number of BDCs trading at or above net book value per share fell to 10, from 15 the week before, and 21 earlier in the year.

We’ve been lower by this metric – 8 – but only in that week where prices reached their lowest levels.

There is now only 1 BDC trading within 10% of its 52 week high and 21 (just about half) 10% or less off their 52 week low, including 11 (a quarter) within 5%.

“Clever” Money

All this suggests that investors are taking “money off the table”, positioning themselves to repurchase the same at a lower price point.

Despite all this price weakness we don’t get the impression that market participants really believe some sort of apocalypse of losses and lower earnings is coming.

Ever Higher

If they do, it’s at variance with the analyst community, which just keeps on increasing their earnings estimates.

We reviewed the 2023 EPS estimates over the 2022 levels for the first ten BDCs alphabetically and found – in EVERY CASE – the analysts expect an increase next year.

Furthermore, as we noted in the BDC Daily News Feed this week, our records show that of the 41 BDCs reporting their latest regular distributions, 16 moved the payout higher and 25 were unchanged.

The BDC Reporter’s own projections about BDC dividend payouts suggests 23 players will increase their total payouts this year over last.

Looking one year forward to 2023 – into the year that many are claiming will include a recession – we’re still projecting 15 BDCs will increase their payouts over 2022.

Latest Evidence

This week, we had Trinity Capital (TRIN) – a venture debt BDC – sharply increasing its regular IIIQ 2022 distribution, the third such raise in as many quarters, as discussed here.

The week before, Blackstone Secured Lending Fund (BXSL) was the one upping its already announced IIIQ 2022 distribution by 9.3% !

When Bad News Is Good News

Finally, all the revised projections coming out in recent days indicating that the Fed will raise its reference rate higher and maintain for longer only add to the outlook for sustainably higher earnings.

If anything, BDC prices should have risen this week on these developments.

Which is all to say that if investors are expecting a major credit wipe-out that would explain these lower stock prices they are exhibiting an amazing long term prescience at variance with the data both short and long term, and just 5 months after having marched BDC prices up to record highs.