BDC COMMON STOCKS

Week 24

Turning Point?

This might have been a seminal week for BDC common stock prices – and maybe for BDC bonds as well.

As everyone already knows, the CPI report for May 2024 was published on Wednesday and was found to be unchanged from the month before.

Economists had expected a 0.1% increase.

Excluding volatile food and energy prices, core CPI increased 0.2% on the month, versus 0.3% expected.

On a trailing 12 month basis, the CPI has increased 3.3%.

A day later, wholesale inflation – which was up 0.5% in April, fell (0.2%) in May – also better than what the dismal scientists had expected.

Happy. Not So Happy.

This was all very exciting for the major markets which all moved up on the news – and the irrepressible expectation that this news means the Fed will shortly begin reducing interest rates.

The story was very different where BDC common stock prices were concerned.

The sudden, revived prospect of interest rates falling in September or November of this year – the month depends on who you’re talking to -appears to have thrown cold water on the red-hot BDC rally.

Before this inflation news broke 3 BDCs had reached new 52 week-highs on Monday and Tuesday.

Slip Sliding

Suddenly, though, BDC prices began to slip from Wednesday on across the sector.

While the S&P 500 went up 1.6%, BDCZ – the exchange traded note which holds most BDC stocks – fell (1.4%).

The number of BDCs increasing in price over the week dropped to 12, while 30 stocks fell – reversing a three week long trend of many more BDCs in the black than in the red.

5 BDCs decreased by more than (3%) this week and only 1 increased by 3%.

Moreover, the number of BDCs trading at or or above net book value per share – which had reached a record of 22 just last week – fell back to 20.

In apparent evidence of profit taking on a broad scale – instead of 24 BDCs – out of 42 – trading within 5% of their 52 week highs, we were left on Friday with 15.

Also worth noting, the number of BDCs trading within (5%) of their 52 week lows suddenly jumped from 1 to 5 in a week.

Those 5 BDCs close to their nadir is the highest number since October 2023.

Zeitgeist

We can never be certain but all this price shifting must be related to a changing macro view.

We religiously review all BDC news every day – which one can find in the BDC Publications feed on the website – and there was nothing that occurred which could have caused such a material shift in momentum.

We (Hope) We Won’t Be Fooled Again

Not that we’re saying the BDC rally is dead.

We’ve seen the BDC market move down only to turn back up again many times before.

In this case, all this optimism in the major markets is based on a handful of economic metrics that are often revised downwards in future periods and/or change direction 30 days later.

No Big Deal

Moreover – on reflection – BDC investors might realize that a (0.25%) decrease in the Fed Funds rate translates into a tiny (2%) per annum or so lower investment income.

Depending on when the rate drop occurs, 2024 may see no visible change in BDC economics.

Whatever the rate drop ends up being and when, most BDCs will also benefit in the form of immediate lower borrowing costs on their secured, floating rate, borrowings.

There’s always a cohort of investors seeking to front-run expected macro changes – which sends a chill down everyone else’s spines – but it’s possible nothing might yet change.

Or, if it does, the knock-on impact on BDC earnings, book values and dividends might not amount to much for at least 6 months, or even longer.

On the other hand – as Grandma always used to say: “Don’t fight the tape”.

Musings

The next few weeks will be instructive.

Will we see further downside? For a (5%) drop from a recent high (which was $19.96 on June 6)- our definition for the end of a rally – BDCZ will need to fall below $19.00 a share.

We’ve not been there since April 18, 2024 – two months ago.

Where We Are

While we wait further developments – and with IIQ 2024 earnings season still 6 weeks away – let’s review where we stand as of week 24 of 2024:

BDCZ is trading (2%) below its 52-week high of $20.0 and is up 3.3% YTD and 12.3% over 12 months.

For the record, the ETN is trading 20% above its 52 week-low – a number we’ve not been concerned with for a long time.

The S&P BDC Index – calculated on a total return basis, which includes price change and dividends received – has increased 9.6% in 2024 and 26.7% in the last 12 months.

Going by individual stock prices 16 are in the black in 2024, 15 in the red and one was not around all year – Palmer Square (PSBD).

Over 12 months, a more impressive 31 stocks are in the black, 10 are in the red and 1 is PSBD.

Perspective

Pulling back even further for a 5 year historical perspective, BDCZ – even at its recent high point – has never quite reached back to its prior highs in 2022 (just before interest rates began to climb) and in 2020 (just before anyone knew what Covid-19 meant).

Notwithstanding 2024’s strong BDC balance sheets; mostly modest credit challenges and higher distribution levels than in 2022 and 2020, BDCZ’s price has remained muted in a relative sense.

This might give an optimist hope that BDC sector prices after this “moment of doubt and pain” – to quote the Rolling Stones – might yet find their way further northwards.