BDC COMMON STOCKS

Week 5

Unbroken

The BDC common stock price rally continued for a fifth week in a row.

Going by the price of BDCZ – the UBS-sponsored exchange-traded note which owns most public BDC stocks and which we use as a price guide – the sector was up 0.7% in the week ended February 3, 2023.

Looking back over our records, this long series of “up” weeks have not previously occurred since the spring of 2021.

BDCZ closed at $17.87, from $16.72 on December 30, 2022 – conveniently the last day of the year.

Even better, the S&P BDC Index – calculated on a “total return” basis – is up 9.9% in 2023.

Part Of A Trend

Of course, BDC investors were not alone – there’s been a much-disparaged rally going on across all the major indices.

The S&P 500 was up 1.6% this week and 7.7% YTD. The NASDAQ and the Dow Jones are also sharply in the black since the new year began.

Softer

Thanks to a jobs report on Friday, though, that “crushed” economists’ expectations for employment growth – and left investors unsure what to think – BDCZ closed on a weak note.

Going by our metrics, the rally was a little weaker than in Week 4.

30 individual BDCs were up in price, versus 36 the week before, and 41 in the week ended January 13, 2023.

Only 2 BDCs were up 3% or more in price, compared to 41 in Week 4.

By the way, those two outsized gainers were Great Elm Capital (GECC) – up 4.85% – and Gladstone Capital (GLAD)- up 3.88%.

Neither BDC – especially the former – has much of a market cap and small changes in buying volumes can boost prices.

It’s also true that GLAD recently increased its monthly distribution by 7.1%.

Nothing Left

Otherwise, higher prices mean the bargain shelves have been swept clean – like toilet paper in the early days of the pandemic.

No BDC trades within (10%) of its 52-week low.

Apex

We even had a BDC reach a new 52-week high: First Eagle Alternative Credit (FCRD) which reached $4.7300 as recently as Friday, in anticipation of becoming part of Crescent Capital (CCAP) shortly.

CCAP’s stock price, though, is anemic by comparison, ending Friday (18%) below its 52-week high and (23%) below net book value per share.

Not There Yet

Generally speaking, though, BDC stock prices are still some way from the heady days of last spring.

BDCZ peaked on March 29, 2022, and is now (13%) lower in price.

At this point, only 3 BDCs are trading within 5% of their 52-week highs.

These are the aforementioned FCRD, followed by Stellus Capital (SCM) and Fidus Investment (FDUS).

We’ve explained why FCRD is on the list and FDUS did announce a huge “deemed distribution” this week, which we analyzed in the BDC Reporter.

We have no idea why SCM is flying as high at a price of $14.64, up from $11.02 in mid-June 2022 – a 33% increase.

Upswing

Going by Seeking Alpha data, no less than 18 BDCs are up by 10% or more this year.

(Coincidentally over that longer period, number 18 is SCM).

Key Question

What we’d all like to know – with 38 BDCs up in price this year – is whether this rally will continue or fade like prior revivals in June and October, both of which ultimately faded away.

This rally began in mid-December 2022 and is now – more or less – 7 weeks long.

Of course, we don’t know and if we did wouldn’t say.

However, there’s no doubt that BDC earnings season – if you begin with Saratoga Investment (SAR) a few weeks ago and take into account Capital Southwest (CSWC) and Gladstone Investment (GAIN) – has begun suspiciously enough.

GAIN reported an increase in NAV Per Share, despite writing down a portfolio company position to the tune of ($10mn) and doubling its “supplemental” distribution from the prior quarter.

CSWC saw its Pre-Tax Net Investment Income Per Share increase 11% in 90 days, despite selling a boatload of new shares and increasing its total quarterly payout to $0.58, from $0.57.

Most impressive of all was SAR’s 26% increase in its distribution for the quarter that ended in November 2022.

Preliminary IVQ 2022 results for Main Street Capital (MAIN) and PennantPark Floating Rate (PFLT) were respectively encouraging and Just Okay.

However, to PFLT’s credit – they performed well enough to join Ares Capital (ARCC) in undertaking a secondary during 2023.

Looks Good

Going by the analyst earnings estimates, many more BDCs will be reporting good results for the IVQ 2022 in the days ahead, and – as we’ve discussed before – the outlook for 2023 is for a 10%+ growth in BDC earnings on average.

At a time when most companies in most industries are wringing their hands about a coming earnings decline, the BDC sector seems poised to post record EPS and dividend growth.

Old Hat

As always, the fear of a substantial increase in credit write-offs keeps BDC investors from running amok.

However, the renewed optimism this week of a “soft landing” might have tempered that reasonable concern.

Segue

We’ll take a longer look at this subject when we undertake the BDC Reporter’s world-famous weekly Credit Recap.

There’s plenty to talk about and material for both bulls and bears.