BDC Common Stocks

Week 20

Foreword

Our weekly recap is being published a day or so late, for which we apologize. The culprits are forces we cannot see or understand. Out of the blue, we wake up to NOT find our website, which occurred on Saturday. (We wrote the following article in Google Docs and kept it in storage till Monday morning when the website re-appeared). In the interim, my colleague in charge of such things has been making the internet rounds trying to diagnose the problem.Even now, we’re not clear if we were hacked or something else. In the future, once we fully diagnose the issue we may move the BDC Reporter to the Ghost platform which we use for BDC Credit Reporter and BDC Best Ideas to ensure no repeat performance. Unfortunately, this has happened two or three times in recent years. In any case, we’re back…

Left Behind

You may have heard – the week ended May 17, 2024 was a very good one for the major indices.

The Dow Jones Index – which rarely gets much attention – was all over the news for breaking through 40,000 points for the first time in its history.

On the week, the DJI was up 1.2%

The S&P 500 rose above 5,300 points and was up 1.5% on the week. 

The best performer, though, amongst the most popular indices was the NASDAQ, which rose 2.1%.

All this contrasts with the performance of the BDC sector – as reflected in the price change of BDCZ, the exchange-traded note which owns virtually all the public BDC stocks.

BDCZ was down (0.2%).

That other measuring stick we employ – the BDC S&P Index, calculated on a “total return” basis, dropped (0.4%).

Explanations

Our theory for the discrepancy between the euphoria in the major indices and the “meh” performance of the BDC sector is the latest shift in the financial zeitgeist.

This week, the latest inflation numbers came in “softer” than expected and you can guess what followed.

 “Following the data, markets were off to the races as investors ramped up their Federal Reserve interest rate-cut bets” 

Wall Street Breakfast May 18, 2024

Suddenly, the interest rate futures were accelerating their expectations of the date when the first interest rate cut would occur.

Those BDC investors who pay attention to these big picture movements may have been nonplussed by this latest, more “dovish” development because lower rates sooner means – pretty much – lower BDC earnings sooner.

Another factor might have been that the BDC earnings season came to an end this week with Investcorp Credit Management (ICMB) and Capital Southwest (CSWC) reporting to close out the quarter.

By now, the markets have absorbed the latest information from BDC-land and adjusted their investments accordingly. 

Not Much

In any case, BDC price movement was relatively modest.

Yes, a majority of  BDC stocks dropped in price but it was a slim majority, with 22 down and 20 up or flat.

Only 2 BDCs moved down more than (3%), while 2 others moved 3% in the opposite direction.

For the record, the former consisted of Goldman Sachs BDC (GSBD) and Blackstone Senior Funding (GSBD).

Both had reported results some time ago and any red ink was more in the nature of profit-taking than anything else.

The two BDCs remain in the black in 2024 and are trading close to their 52-week highs.

No panic selling here.

The two BDCs with over 3% price increases were OFS Capital (OFS) and Prospect Capital (PSEC).

Neither BDC has covered itself with glory where fundamentals are concerned in the last year but some would-be “value buyers” must foresee that some sort of price bottom has been reached.

Maybe. Maybe not.

We’ll be taking a closer look shortly at these two very different BDCS whose net asset value per share have dropped (18%) and (10%) respectively since the end of 2022. 

Neither has increased its quarterly distribution in the past year either at a time when most of their BDC peers have been upping not only their “regular” distributions but also finding ways to pay out “supplentals” as well.

Not Done Yet?

Another sign of underlying strength remaining in the BDC rally despite this week’s (0.2%) drop is that a “robust” 8 BDCs reached new 52-week highs over the last 5 days.

That’s not the highest number we’ve seen on a weekly basis of late, but is still noteworthy.

Likewise, the number of BDCs trading at or above net book value per share was a still very high 20 names, down from 21 the week before, which was a record.

By the way, by our calculation, the 42 BDCs we track are trading at 99% of their net book value.

To us, that suggests a market still very excited about BDC investing.

So does another metric: the fact that 23 BDCs are trading within 5% of their 52-week highs and another 6 within 5%-10%. 

Those may not be the very best metrics we’ve seen in this long upward price run, but they’re not far off.