BDC COMMON STOCKS

Week 2

Beat Goes On

The mini-2023 BDC rally continued for a second week, despite a slump on Friday.

BDCZ – the UBS-sponsored Exchange Traded Note which serves as our price guide at times – closed at $17.26 – up 1.3%.

However, this was a quarterly dividend payment week so the numbers are not useful.

The S&P BDC Index – on a price change basis only – moved up 4.3%, which gives you more of a sense of the upward shift.

For a second week, the BDC sector was up more than the S&P 500 itself, up 2.7%.

The major indices are in a mini-rally of their own in these early days of 2023 with the promise that lower inflation will result in less stringent rate increases and no recession in 2023.

Back And Forth We Go

This has been endlessly debated all week in the financial chattering classes.

We bookmark any relevant article we see on the subject but after twenty or thirty versions of the same debate as to whether we’re headed into a recession after all or to a “soft landing”, we gave up.

Unperturbed

All we know is that BDC investors are definitely not buying into the prospect of a hard landing or even a mild recession based on recent price movements.

After all, the leading BDC – Ares Capital (ARCC) – was able to successfully launch yet another secondary offering at a (tiny) premium to net book value this week, as we discussed in an article.

Investors don’t pay up for new shares if a recession scenario is high on their agenda.

In fact, 41 BDCs out of 43 increased in price, even more than the 38 in that same category last week.

Of those BDCs in the black, 29 were up 3.0% or more, nearly twice as many as the week before.

Faster

Basically, the rally is accelerating.

This is reflected both in the lower number of BDCs trading within 10% of their 52-week lows (5 versus 11 last week) and the higher number trading within 10% of their 52-week price highs (7 versus 3).

Even the number of BDCs trading above net book value per share increased sharply from week to week, jumping to 11 from 7.

Origin Story

Since the BDC sector slumped to its lowest recent point on December 19, 2022, the S&P BDC Index is up 7.3% on a price-only basis.

This suggests the current BDC sector price resurgence is roughly 4 weeks long.

Case In Point

The excellent financial performance by Saratoga Investment (SAR) through the quarter that ended November 30, 2022 – reviewed by the BDC Reporter in some detail – must have boosted the bulls.

If SAR is the canary in the coal mine of future BDC results then get ready for big jumps in average portfolio yields; robust earnings growth and little change in asset values.

No Problem

Judging by ARCC’s equity raise; SAR’s growing portfolio size and revelations by multiple other BDCs (including Golub Capital – GBDC- featured in an article) during the week about relatively high levels of new investment activity, the BDC sector is forging ahead and damning the torpedos.

As we reported in yet another article, the analyst community is projecting that the majority of BDCs – regardless of what sort of “landing” we’re getting in 2023 – will be increasing their earnings in 2023 over an already healthy level in 2022.

With many public companies slated to report lower earnings – especially in the first half of this new year – maybe it’s no wonder that BDC price increases are currently outstripping the major indices.

On The Other Hand…

Still, we’ve seen plenty of market chatter suggesting that the first flush of enthusiasm in the markets may wane in the days ahead.

Roughly speaking the argument runs that inflation – although dropping – is going to be harder to bring in line than investors appreciate and the Fed’s scorched earth rates policy will be implemented in full before this is all over.

Of course, this will be bad for stocks generally as well as for BDCs who might earn more from higher rates but will feel the lash of a big jump in credit losses.

$64,000 Issue

More on this subject when we roll out our second installment of the BDC Credit Recap.

Spoiler Alert: As Nelson said, “I see no signal”. He was holding a telescope to his blind eye at the Battle Of Copenhagen when viewing ship signals to retreat. In our case, we yet fail to see any upsurge in credit stress across the thousands of BDC portfolio companies we track in the BDC Reporter.

Certainly – as we’ve noted – nothing untoward showed up in our credit survey of SAR earlier in the week.

Staying Power?

We’ll be interested to see if BDC investors will maintain their month-long excitement as this rally grows longer in the tooth and the nay-sayers, who included the CEO of Bank America, grow louder.