BDC COMMON STOCKS

Week 41

Undecided

The markets cannot seem to make up their mind about the latest inflation data (sticky) and whether to be worried about the unexpected surge in interest rates across the maturity spectrum.

Two weeks ago, the BDC sector incurred a (3.0%) drop in price – the second-worst weekly performance of the year.

This week – going by the S&P BDC Index calculated on a price basis only – the sector was up 0.7%.

(We’re not using BDCZ – the exchange-traded note that owns most BDC stocks and our usual price guide – because a dividend was paid out this week, which affects the closing price).

Market yields in both periods were very high and inflation metrics were well off the Federal Reserve’s 2.0% target.

We can’t help feeling there’s a lot of “shoot first and ask questions later” when the government statistics come out.

Proceeding

Anyway, the downturn in the BDC sector that began very late in September has – so far – not ended the long-running BDC rally.

From highest to lowest closing price – going both by the S&P BDC Index and BDCZ adjusted for the distribution – the downdraft was less than (5%).

On Week 41, 26 individual BDCs increased in price and 16 decreased.

There were no stocks reaching a new 52-week high – or low.

Where We Stand

Let’s have a look at where the BDC sector stands after this mini-shock.

The S&P BDC Index remains a robust 7.92% up in price terms in 2023.

The total return S&P BDC Index – which includes those record dividends being paid out – is up 17.8%.

We’ve been up as high as 20.5%, but this level of total return is still way above average for BDCs.

More Metrics

31 individual BDCs – three-quarters of the tracked universe – are in the black price-wise this year.

At one point, there were 38 in this category, but this remains an impressive number.

10 BDCs trade at a price over net book value per share, down from a 2023 peak of 15 set in July.

What the Bulls Believe

The numbers suggest that there is plenty of room for this BDC rally to continue.

The S&P BDC Index will need to increase by just under 5% to match 2023’s high point set in the summer and 17% to beat out the highs of April 2022.

Moreover, there are only 5 BDCs currently trading within 5% of their 52-week highest price and another 16 5%-10% off.

That leaves plenty of room for new individual records to be set, especially as so many BDCs are coming through with record results of one kind or another.

Saratoga Investment (SAR) reported its quarterly results for the period ended August 2023 this week. The earnings were flat over the prior quarter, but both the BDC’s assets under management and dividend are at peak levels.

Gladstone Capital (GLAD) and Gladstone Investment (GAIN) announced their final distributions for 2023. The total payouts for 2023 were 21% and 22% higher than in 2022, respectively. See the BDC Publications News Feed.

Also – and as we’ve noted before – all this talk of “higher for longer” where interest rates are concerned is causing analysts to up their forecasts for BDC earnings in 2024.

Best Is Yet To Come

We’re on the record projecting that next year – not 2023 – may bring peak earnings and distributions to the BDC sector.

Heck, all that talk about stubborn inflation and the 10-year Treasury going to 13% might mean BDC earnings might still be at record levels in 2025 – just 14 months and an interminable number of articles about what the Fed will do next – away.

What The Bears Fear

As usual, there are plenty of Wall Street “strategists”; economists, and pundits promising us a recession in the months ahead.

This would – presumably – involve a dramatic turnaround in inflation, GDP, and interest rates, causing us to look back fondly on 2022 and 2023.

According to the standard playbook, this would cause new investment activity to slow down (less fees for BDCs); credit losses to increase (less performing loans), and the Fed Funds rate to drop sharply (lower investment income, partly offset by lower borrowing costs) and lower net book value (from deteriorating asset prices).

Maybe that’s what the Fed secretly hopes for to tackle inflation to the ground but the problem is that in our corner of the universe, there’s no sign that’s happening.

Looking Good

In fact, this week we heard from Golub Capital, whose index of middle-market company sales and earnings performance indicated very healthy numbers.

See the BDC Reporter’s article on the subject.

That’s only one metric in a sea of them but is consistent with what we’ve been noticing in our constant reviewing of recent BDC financial performance and listening to more than three dozen conference calls.

Advantage

We know the world can turn on a dime so we won’t draw any grandiloquent conclusions.

The future could belong to either the bulls or the bears, but the former has the upper hand at the moment as that long-toothed BDC rally indicates.