Going Strong

BDC COMMON STOCKS

Week 17

Double Barreled

Last week the major indices were in retreat, but the BDC sector – and most individual BDC prices – were charging ahead.

5 business days later and despite many over-dramatic headlines about a slowing GDP (which might get revised upward or downward in the future); “stubborn” inflation, “higher for longer” rates and all that jazz, both the main markets and the BDCs moved up strongly.

“The S&P and Nasdaq clinched their best week since November“, with the former up 2.7% and the latter 4.2%. The Dow Jones – always a little idionsyncratic – moved up 0.7%.

Not to be left out, BDCZ – the exchange-traded note which owns most of the public BDC stocks and serves as one of the ways we monitor sector price performance – moved up 1.8% as did the S&P BDC Index – calculated on both price and total return basis.

Evidence

Those percentages don’t tell the story quite as much as the fact that 38 of the 42 BDCs we track were in the black.

That’s the largest number of BDCs in the weekly winning column since there were 40 in the week-ended November 3, 2023

Also illustrative of this week’s animal spirits, 18 of those BDCs in the black were up 3.0% or more – the most since – you guessed it! – November 3, 2023.

Top of the charts were Trinity Capital (TRIN); Bain Capital Specialty Finance (BCSF) and Saratoga Investment (SAR).

We had a glance at the stock chart of the three BDCs and all seem to be bouncing up after being stuck in neutral in recent weeks.

Investors are clearly revving up their engines and placing bets in advance of earnings season.

Moving Up

This 2024 YTD price chart for SAR should hopefully illustrate our point.

Ever since reporting results that disappointed the market back in January, SAR has been in the doghouse.

Until last week, SAR was (12.7%) behind YTD – one of the worst performers.

This week – in one fell swoop – the BDC moved up 39% in price.

There’s plenty of room of SAR to move up further. The BDC remains the 7th worst performer and (17%) below its 52-week high.

This for a BDC that has increased its quarterly dividend 7 quarters in a row and has increased its NAV Per Share (NAVPS) 18% over the past 5 years.

Investors can be cold…

Bullet Proof

The percentage increase leader was Trinity Capital (TRIN) – up 6.5%.

This occurred in a week where our sister publication – the BDC Credit Reporter – wrote an article detailing what seems like a major setback at one of the BDCs portfolio companies: Nexii Building Solutions.

The bankrupt business put itself up for sale to help repay its $80mn in debts but only received 1 bid – from existing management – for $3mn.

TRIN – and Horizon Technology Finance (HRZN) – have invested at least $60mn in Nexii and might be out the full amount – give or take a few million.

Maybe investors have already discounted the news.

After all, Nexii has been on non-accrual since the IVQ 2023 and TRIN’s exposure is more modest than HRZN’s.

Coming Up

Starting next week, BDC earnings season begins and lasts through most of May.

Last quarter saw more than a quarter of the BDC universe post weak performance, and saw their stock price punished accordingly – albeit to different degrees.

Standing on the threshold of the IQ 2024 results, here’s where the BDC sector stands:

BDCZ is trading 2.2% ahead of its level at the end of 2023 and only (3.1%) below its 52-week high.

The BDC sector – using the S&P total return calculation – is up a robust 8.3%, better than the S&P 500 when all income is considered.

We are undoubtedly very much in rally territory with more than half the BDCs out there – 23 – trading within 5% of their 52 week highs, and another 9 only marginally off the pace at 5%-10% off.

This week alone 8 BDCs set new 52 week price records.

This included MAIN, which is close to breaking the $50 a share barrier and is at its highest level EVER, as this chart shows:

Unforgettable

We’d be remiss if we didn’t mention that intra-day on Friday April 26, 2024 Hercules Capital (HTGC) – loudly celebrating its 20 year history as a public company this qweek – also set a new all-time price record.

Even Handed

All the above – plus the fact that 20 BDCs are trading at or above book value – see the BDC NAV Change Table – underscores that the sector is red hot right now.

Before we sound too breathless, let’s point out that 12 of the 41 BDCs active all year (Portman Square BDC – PSBD – gets a pass) are still in the red in 2024 so far.

Of those, we calculate that 7 are in the red on a “total return” basis.

This suggests that most investors long the market are probably rubbing their hands and enjoying a good year but if you happen to be too heavy on OFS, TCPC, TPVG, PSEC, HRZN, SAR and ICMB, the good times are not yet rolling.

In each of those cases, weak credit performance seems to be at the root of their price weakness.

The year, though, is just getting going and there’s plenty of time for any or all of the Failing Seven to turn their fortunes round, or slip further behind.

Moreover, there are a number of BDCs that performed poorly in the IVQ 2023 who’ve not been punished too harshly that might not get a second chance if they post a repeat performance in the IQ 2024.

Based on the BDC Reporter’s quantitative assessment of overall performance, these BDCs might be cause for concern: FS-KKR Capital (FSK); Logan Ridge Finance (LRFC); Runway Growth Finance (RWAY) and WhiteHorse Finance (WHF).

We’ll be tracking all the IQ 2024 BDC earnings developments – and everything else – that happens.

This includes our Quarterly Performance Table, with its scoring system of 1 to 5 where a score 1 or 2 signifies underperformance against expectations, a 3 means performance in line and 4 or 5 out-performance.

Also ready to be constantly updated will be the NAV Change Table with each BDC’s NAVPS and the world famous BDC Credit Table which tracks every player’s multiple credit metrics.

You can track the date of each BDC’s earnings release and the date and time of their conference call in the BDC Earnings Calendar.

With that said all the above reportage will have to wait a week because the BDC Reporter will be on the high seas from this Saturday till the next in a case of unfortunate scheduling.

We promise to get everyone caught up once we are on dry ground and long before BDC earnings season is over.