BDC COMMON STOCKS

Week 49

Zig And Zag

Frankly – and in the spirit of the season – the BDC Reporter expected BDC prices to rise again this week, after a nice upward bump over the Thanksgiving period.

In another reminder that – for us at least – short term guesswork about price direction is just that, the BDC sector fell (1.57%).

(Adding insult to injury, the S&P 500 which we constantly – and inappropriately – compare ourselves to moved up 1.13%).

30 individual BDCs dropped in price, and 13 were unchanged or increased.

Not Much

By BDC standards, price volatility was moderate, with 4 BDCs moving up 3.0% or more over the week and 3 moving (3%) or more to the downside.

Just a few weeks ago 37 BDCs moved up and down by that 3% plus margin.

Like the week before, just 12 BDCs are trading above net book value per share.

Pancake-Like

Over the last month or so – as this BDCZ chart shows – the sector has been trading pretty flat.

(Ignore the 11-15 to 11-16 downward dagger in the chart).

Breathless

The rally that began in late September – after the BDC sector and all the major indices dropped to their lowest lows – appears to have lost steam.

As we’ve been saying of late, that leaves most every BDC stock trading halfway between its high and low price of the past 52 weeks.

As of now, there are only 4 BDCs trading within 10% of their 52 week high (including only 1 within 5%) and 5 between 0-10% of their 52 week low.

Not Pretty

Furthermore, with 2022 rapidly coming to a close, only 3 BDCs can point to having a higher price as of now versus December 31, 2022.

Those are – very randomly as each BDC is very different than the other: Fidus Investment (FDUS) at 11% up; Stellus Capital (SCM) up 6% and Carlyle Secured Lending (CGBD), also 6% up.

Toss Up

The S&P BDC index “total return” calculation – which last week was at a level that promised a possible gain for 2022 has slipped back, and is now (5.3%) down in 2022.

BDCZ – which serves to illustrate the sector’s price change – is off (12.6%).

In both cases – and especially where BDCZ is concerned – we are going to need a drastic change in sentiment in the few weeks ahead if BDC investors are going to break even, or better, in 2022.

Not Much

To our mind, nothing occurred this week to change the mood much.

There was an unsecured note offering by Runway Growth Finance (RWAY) – the second one this year.

We spent a good deal of time discussing what this might tell us about the long term capital raising choices of the sector, but there was nothing earth shattering to report.

Main Street Capital (MAIN) arranged a new revolver, but that was hardly news as secured financings – whether in CLO or traditional bank revolver format – have been available to most every BDC that wants one all year.

The debt markets are mostly open for those BDCs who really want to go there, but most players are in a wait-and-see mode.

Unpopular

Barron’s said some not very nice things about investing in BDC common stocks right now given the ever impending risk of recession.

We didn’t concur, as discussed in a wide ranging article we wrote, but there was nothing earth shattering said either for or against the sector.

To Our Credit

On the credit side, both at the BDC Reporter and BDC Credit Reporter, we’ve been doing a great deal of work getting our arms around the portfolios of various BDCs now IIIQ 2022 earnings season is behind us.

This week we published credit articles about both Ares Capital (ARCC) and BlackRock Capital Investment (BKCC).

However, what we found most interesting – once again – is that we’re not seeing much of any credit deterioration in recent weeks.

Every day we track developments – thanks to a Google Search function – hundreds of underperforming companies financed by BDCs.

We also – morbidly – check out whose filed Chapter 11 and read a host of specialist publications that report on credit troubles .

Going by the headlines we’d expect to see a mountain of news items about new financial difficulties, but there’s little to report.

Mild

There are troubles at Isagenix, Carvana, Walker Edison Furniture, Carlson Travel and a number of other names but nothing much out of the ordinary given that the universe of companies involved is over 4,000.

We recently reviewed Barings BDC’s (BBDC) portfolio and were struck by how many foreign companies on their books – especially in Europe – were getting written down enough to become underperformers in the last couple of quarters.

That’s probably to be expected and all those newer underperformers are still rated only CCR 3, which means that the chances of getting repaid in full are higher than recognizing an eventual permanent loss.

All to say – with only 3 weeks to go in the year – we’re not yet seeing in the public record signs of the credit apocalypse that so many fear is to come.

Undecided

We remain in a waiting game – as the trend in recent BDC prices suggest.

Moreover, common sense suggests that many months yet have to pass till we see which way the world of leveraged lending tips – between record income on one side and a a surge in bad loans on the other.