BDC Common Stocks

Week 28

Continuing

This week, BDCZ – the UBS-sponsored exchange-traded note we use as a price guide for the BDC sector – was down (0.7%) in price to close at $17.69.

However, that was only because this was the week when BDCZ pays out its quarterly distribution (which, by the way, was $0.4290).

Adjusting for that, BDCZ would have been $18.1190, or up 1.7%.

Second Opinion

We double-checked with the S&P BDC index – using the price-only calculation – and that moved up 2.0%.

Going Strong

All the metrics support the picture of a BDC sector in full-on rally mode, continuing a trend that resumed May 5 when BDCZ was at $16.37.

This week, 38 BDCs out of 42 were up in price, and only 4 were in the red.

Of the BDCs in the black, 11 increased by 3.0% or more as investors prepared themselves for BDC earnings season just around the corner.

Underwhelmed

Ironically, the BDC that performed worse this quarter was Saratoga Investment (SAR), which reported its results for the quarter ended May 31, 2023, this week.

Premium subscribers can read the BDC Reporter’s first-look recap here.

Although earnings were hugely up over a year ago and robustly higher than in the quarter before, SAR fell (3.3%) from Friday to Friday, and was done (6.4%) at one point intra-week after the results were published.

Not helping was a downgrade by Raymond James, published on Wednesday – shortly after the release.

Although the analyst involved was impressed by SAR’s earnings power, the risk-reward involved was regarded as not favorable, and the stock was rated “Market Perform”.

If you’re interested in a second opinion, BDC Best Ideas also expressed its opinion in a “Buy, Sell or Hold” article about SAR around the same time. Note, though, a subscription is required.

Back To The Sector Metrics

The rally means there are very few BDCs left trading near their 52-week price lows: just 2 within 10%.

Conversely, the number of BDCs within 0%-5% and 5%-10% of their 52-week highs has increased to 6 and 15 respectively.

That’s half the public BDC universe.

Loneliest Number

However, we’re not yet at peak price performance.

There was only one BDC this week reaching a new 52-week high: Blackstone Secured Lending Fund (BXSL), which remains on a tear.

Should the rally continue, there will be many more.

Over The Top

Also, the number of BDCs trading at a premium to net book value per share has increased to 15.

That’s still below the 20-21 BDCs we’ve seen in the past trading at a premium at market peaks but is headed in that direction.

Back in March when all anyone could talk about was Silicon Valley Bank and the potential implosion of the financial markets (investors are very nervy folk) there were only 5 BDCs at a premium.

Another consequence of more and more BDCs trading over NAVPS is likely to be an increase in new equity capital getting raised from secondaries and At The Market (“ATM”) issuances.

This augurs well for the sector’s assets under management (AUM) growth and for higher BDC earnings.

What’s Next

Obviously, we don’t know how long this rally keeps keeping on, but we are reaching (or have already reached) the sort of stage where FOMO (“Fear Of Missing Out”) kicks in.

Moreover, with a flurry of earnings and dividend announcements coming up for the next many weeks, BDC investors on the sidelines are going to get constantly reminded that the sector is at peak earnings and that distributions have never been higher.

With the perceived risk of a nasty recession seemingly receding, some investors will be asking themselves just what they are waiting for.

Seven And A Half Months In

BDCZ is up 5.8% already this year and the “total return” S&P BDC index has gone up 15.7%.

Three-quarters of the 42 BDCs we track are trading at a higher price on July 14, 2023, than at year-end 2022.

Left Behind

Even amongst the minority of BDCs in the red YTD on a price basis, only three are materially underperforming once distributions received are considered.

The BDCs in question are BlackRock TCP Capital (TCPC); Portman Ridge Finance (PTMN) and Prospect Capital (PSEC).

Each BDC is very different than the other but all are bound together this year by investor dissatisfaction.

Yet, in this or any rally, that could change.

Destination?

The next few weeks are going to be very interesting.

A useful reminder is that BDCZ closed at $20.59 back in late March 2022, just before the current downturn – 16% above the current level.

However, BDCZ – going by the latest distribution – is generating distributions 13% higher now than then…