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BDC Market Update: Thursday September 22, 2022

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PREAMBLE

Given the very large – and universal – drop in BDC prices on the day, the BDC Reporter is re-publishing our daily BDC Market Update, typically available most every day (unless we’re travelling or on vacation) in the BDC Daily News Feed. For those who have missed these periodic reports, we summarize how the sector has performed – using the stock price of BIZD – the Van Eck sponsored exchange traded fund which exclusively hold BDC stocks – as our guide. We tell you each time how many BDC stocks were up, down or unchanged in price; how many moved more than 3.0% in either direction (our threshold for a “major move”) and any other color we can offer on the run. Finally, we also – briefly – discuss what’s happening in the world of BDC Fixed Income and especially the 20 publicly traded unsecured notes issued by 12 different BDC issuers. The BDC Market Update is a useful way to quickly take the temperature of both BDC stocks and bonds, and that seemed especially appropriate on a day where everything seemed to be headed down.

BDC MARKET UPDATE – Thursday September 22, 2022

BDC stocks were in full retreat on Thursday, dropping in one day in what would normally occur in a bad week. The drop was far in excess of the major indices – themselves also continuing a Fed-induced downward trend. If Chairman Powell wanted to convince by his words that he was ready to countenance a recession as the price for getting inflation under control, he seems to have done so. Every BDC stock was in the red, with 24 of 43 down more than (3.0%). The biggest percentage losses were as high as (5.5%). We’ll have much more analysis in the BDC Common Stocks Market Recap over the weekend, but we can point out already that 12 stocks have reached new 52 week lows this week, most of them today. These include some very successful players with stable or increasing dividends and with a long term track record of growing NAV Per Share including CSWC, TSLX, GLAD and several others. The market didn’t care and ran for the exits. If you go to the BDC NAV Change Table in the Subscriber Tools section, you’ll see there are now only 7 BDCs trading over net book value per share where there were 20 at one point. BIZD is now just over its 2022 low point, set on June 16, 2022. By the way, that’s true – more or less – for all the indices suggesting – as the saying goes – we are close to “retesting” the lows.

The $64,000 question is how much of the BDC sector’s drop is a matter of “monkey see, monkey do” and how much a thoughtful response to the latest news. Given the speed of the descent, its broad based nature and the fact that the latest interest rate increases are favorable to BDC economics indicates the former response is at play. Is this the famous “capitulation” traders are looking for ? We don’t know but trading volumes were high (ARCC traded 50% more shares than usual, BIZD 100% more, etc) but not in “shock and awe” territory. Clearly a lot of investors are headed to the sidelines and that process could continue even as IIIQ 2022 BDC earnings are likely to easily beat out the IIQ and IQ of 2022 levels.

BDC Fixed Income – the 20 unsecured publicly traded notes we cover – had to contend with further increases in the risk free rate. The damage – at least for the moment – was modest under the circumstances, adding a (0.2%) decline to the (0.7%) drop registered already this week. Of course, all this turmoil is also making it difficult for BDCs who might need to raise unsecured debt to do so, whether in the private or public market. It’s not that some BDCs wouldn’t be happy to pay the now much higher yields involved, it’s just there’s too much uncertainty about where medium and long term rates will settle. (The BDCs are primed to earn so much from their floating rate loans that to pay 5%-8% for unsecured debt must seem palatable).

The good news – and we hope we’re not clutching at straws here – is that we could see a major revival of the public unsecured note market. Institutional fixed income lenders – despite the multiple investment grade ratings at many BDCs – are likely to pull in their horns. The “regular Joe’ investor – now that the yields are back in the mid to high single digits – might be delighted to lock in those sort of interest rates for the next 5 years. That’s especially the case amongst those investors who believe that the Fed will ultimately succeed in its crusade against inflation, which will bring fixed income rates down in a couple of years and make any bonds issued currently very attractive. Here and now, though, BDC debt with longer maturities out to 2027 or 2028 are trading down to around $22 a share. Still, even those bonds may see a nice price recovery if and when the Fed scales the inflation walls and declares victory.

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