BDC COMMON STOCKS

Week 16

Godot

BDC investors seem to be in a wait-and-see mode.

Since prices dropped sharply after the Silicon Valley Bank (SVB) collapse – now six weeks ago – nothing much has happened.

This week, BDCZ – the UBS-sponsored exchange-traded note which owns only BDC stocks and serves as a price guide – fell (0.2%) in price.

BDC prices remain a narrow channel, with no apparent catalyst for either a return to the rally that was underway before SVB’s failure or for a further step-down.

BDC earnings season – which begins a week Monday – may bring about a shift but that hasn’t happened as yet.

A Little Dull

Over the last 5 days, 13 BDC stocks were up and 29 were down.

Only 2 BDCs were up by 3% or more, and 6 were down (3%) plus – by BDC standards a very quiet week.

Unchanged was the number of BDCs trading at a premium to net book value per share at 9.

Like last week, not one BDC’s price was within 10% of their 52-week high.

Down at the bottom of the table, the number of players trading within 10% of their 52-week lows edged up to 13 from 11 the week before.

Day And Night

A year that began shiny and bright for BDC investors has darkened.

Through these first 16 weeks, BDCZ is down (1.1%).

(We should note that the BDC S&P Index on a price return is up 2.1% using a different methodology and the only BDC ETF – with the ticker BIZD – is up 1.8% – so you can choose whichever appeals more).

According to Seeking Alpha, 17 BDCs have reached a higher price in 2023 than at year-end 2022, but that means 25 are lower.

From its highest height of 2023 – set on March 6, 2023, just before you-know-what – BDCZ is off (8.4%) as of Friday but was off (11%) right after the SVB news broke.

To Have And To Hold

The only encouraging metric that we can offer BDC bulls is that if you were fully invested in 2023, the total return (price+ dividends) through this first third of the year comes to 5.3%.

Annualize that and you get a 17.2% total return for 2023 going by the S&P BDC Index, most of it earned from clipping dividend coupons that have never been higher.

However, there’s a long way to go yet and 2023 could end up much better or much worse.

News Cycle

As a glance at the BDC Daily News Feed will show, there were very few material developments this week.

Reassuringly – at a time when we’re hearing the words “credit crunch” more than usual – two BDCs reported positive news about their secured lending facilities.

Runway Growth (RWAY) expanded its revolver from $425mn to $500mn and without any increase in the loan spread.

MidCap Financial (MFIN) extended its own Revolver – a key element in its financing – for two more years.

(Total commitments to the Revolver will decrease in the future from $1.705bn to $1.55bn but not till December 2024. We don’t know why, but not of concern in the here and now).

Elsewhere, Stellus Capital (SCM) announced a regular dividend for the second quarter of 2023 that was spectacularly increased two quarters ago.

Chances are also high – going by BDC Best Ideas – that shareholders will also get a “special” distribution later in the year.

This was not surprising news, but enough to make SCM the biggest percentage price gainer in the BDC universe this week – up 4.5%.

YTD, SCM is one of the price gainers: 8.5% in the black overall.

One And Only

The singular “market moving” news of the week came from Main Street Capital (MAIN) which offered investors a preview of its IQ 2023 results.

This was discussed at length in a BDC Reporter premium article.

As always in these situations much more is left out than left in where disclosures are concerned, but MAIN’s key estimates for earnings and net book value per share were excellent.

There was also a suggestion that the BDC would be increasing its distributions shortly given record-breaking earnings.

This helped MAIN to a 1.2% price increase on the week and a stock price that ended the week at a 49% premium to net book value per share – the best of any BDC.

Not Alone

We’re projecting that 2023 will see many, many more BDCs reach record recurring earnings levels thanks to the Fed’s gift of higher rates.

Just going by the actual recurring earnings for 2021 and 2022 and the analyst EPS consensus for 2023 in the Expected Return Table in BDC Best Ideas it looks like 35 BDCs will record their highest results this year in a 3-year span.

The Expected Return Table indicates the sector as a whole should report a 12.3% earnings gain in 2023 over 2022.

Given the analysts’ tendency to project conservative earnings, the final increase might get up to 15%.

Unyielding

Our current projection is that the average yield on BDC stocks in 2023 – once all the regular and special distributions are dotted up over the next few months – will be 13.6%.

Will that be enough to draw investors back into the BDC market after the SVB shock?

We will find out soon enough as we’ll soon be very busy with the quarterly deluge of results.