BDC COMMON STOCKS

Week 38

Lights Out

The Fed came along in mid-week and dimmed the lights for investors by indicating that the economy is rolling along (shame !); rates may yet rise in November and, even if they don’t, those long-awaited rate cuts in 2024 are going to take longer to arrive, and there will be less of them.

Yet – at the same time – the Fed Chairman is believed to have said that a “soft landing” is not a “baseline expectation”, even though that’s not the way we heard it.

Anyway, this was all traumatic for investors who don’t know what to believe anymore and are being spooked by ever higher risk-free interest rates across the maturity spectrum.

Consequences

The S&P dropped four days in a row and (2.9%) for the week – its worst performance in a long time. The Dow fell (1.9%) and the tech-heavy NASDAQ – seemingly always the most impacted by interest rate changes – fell (3.6%).

BDC investors, though, must have read our BDC Best Ideas article – which we’ve made available to all – pointing out that these latest “developments” are almost completely positive for the sector.

Cutting to the chase, we ended with this bold conclusion:

Modest Loss

For the week, BDCZ – the exchange-traded note that holds most BDC stocks and serves as our sector price sensei – dropped only (0.4%) this week.

BDCZ increased in advance of the Fed meeting; dropped sharply afterward and bounced back partially on Friday as cooler heads prevailed.

The “total return” S&P BDC Index was also down only (0.4%) as well.

Roughly two-thirds of the 42 BDCs we track went down in price, but one-third went up or were unchanged.

Admittedly, there were 6 BDCs dropping (3%) or more in price this week and none increasing by more than 2%.

Hardest Hit

The worst performer was WhiteHorse Finance (WHF), down (7.2%), but much of that may be related to its recent dividend payout.

The second worst performer was Investcorp Credit Management (ICMB), which released its earnings on Monday, held its conference call on Tuesday, and filed its 10-K on Friday.

This was the last BDC to report second-quarter earnings and there was little to cheer about, especially as the BDC – going against the BDC grain – will be slightly reducing its dividend payout.

One new non-accrual was added – American Nuts. The company is likely to be restructured later this year, but ICMB seems likely to lose some income-producing power.

Check List

Given the lateness of the 10-K filing, we’ve not yet written any update on ICMB but we will next week.

However, we have updated both the BDC NAV Change Table and the BDC Credit Table with ICMB’s data, allowing us to close out the period and prepare for the IIIQ 2023 releases.

The Never-Ending Story

This week BlackRock TCP Capital (TCPC) set the dates for its results release and conference call for the IIIQ 2023.

However – and as always – Saratoga Investment (SAR) will be the first out the gate, given that its quarter closes one month ahead of everyone else.

Steady

As we’re on the subject, the BDC Reporter expects the third quarter to look much like the second quarter where earnings are concerned, albeit maybe a little bit stronger.

Credit conditions, too, appear to be stable, reflecting the slowly expanding economy the Fed is talking about so BDC net asset values per share (NAVPS) will probably be much unchanged for a third quarter in a row.

The BDC Credit Table shows us that in a universe of 4,000+ BDC-financed companies, there were only 24 new non-accruals in the IIQ, and some of those are overlaps.

The total value of reported underperforming assets increased only 4% in the IIQ 2023 versus the IQ.

As the BDC NAV Change Table shows, 24 BDCs reported increased or unchanged NAVPS in the IIQ 2023 versus the prior period.

Overall, NAVPS for the sector on an unweighted basis increased by 0.3%. That’s exactly the same percentage as in the IQ 2023 versus IVQ 2022.

Price Outlook

It’s impossible to predict – although some investors try to – whether BDC prices will move up or down next week.

However, as we’ve shown, BDC fundamentals remain in very good shape overall and at the bulk of participants, and peak earnings and distributions may be several quarters away.

Furthermore – like diligent squirrels – many BDC managers have built up record levels of undistributed taxable income that will eventually find its way into shareholder pockets.

These factors argue – short of a broader market crisis – against any drastic reversal in the ongoing BDC rally.