BDC COMMON STOCKS

Week 23

Don’t Feel Bad

Admittedly the major indices “out-performed” the BDC sector this week.

The S&P 500 – for example – was up 1.3%, the Nasdaq rose 2.4%, and the Dow added 0.3%.

By comparison, BDCZ – the exchange-traded note which owns only BDC stocks and serves as our useful price guide – dropped (0.2%).

The “total return” S&P BDC Index also slipped (0.2%).

No Worries

However, the rest of the metrics we juggle every week suggest all remains hunky dory for the BDC sector and most of its shareholders.

Notably, at least 7 BDCs reached new 52-week highs over the last 5 days.

These were BDCs that had recently already broken their annual price records, and came from every segment of the market.

Even more telling, the number of BDCs trading at or above their net book value per share (NAVPS) reached a new record of 22 (out of 42).

The prior record was 21 in Week 19.

Standings

At this point, 24 BDCs are trading within 5% of their 52-week highs, and another 7 are just behind, 5%-10% off.

By contrast, only 1 BDC trades within (0%-5%) of its 52 week low and 8 are in the (5%)-(10%) from the low.

On a 2024 YTD basis, 27 BDCs have seen their stock prices increase over the level at the of 2023, 14 are in the red and Palmer Square BDC (PSBD) only joined us intra-year.

We’d say that roughly speaking, three quarters of the BDC universe is participating in the Great BDC rally – which dates back to the fall of 2022 – and one quarter is not.

Left In The Dust

We thought we’d spend some time looking at the denizens of the unfortunate fourth, speculate as to what has caused them to be left behind and how far behind they trail.

After all, the number of underperforming BDCs involved is relatively high – one could argue – given the favorable economic backdrop; the high interest rate environment and plentiful liquidity.

Vying for bottom – and the only BDCs whose price has dropped by a double digit percentage in 2024 are TriplePoint Venture Growth (TPVG) and OFS Capital (OFS).

The wooden spoon holder is OFS, down (16%) in 2024, now trading less than (5%) above its 52-week low and a (12%) discount to its NAVPS.

Recent

OFS has not met performance expectations in the last two quarters – as per our proprietary rating system – and its NAVPS dropped (8%) in the last quarter and (17%) in the past 12 months.

Mr Market only recently recognized that all was not well at OFS – mostly on the credit side – beginning in March.

OFS booked Net Investment Income Per Share of $1.50 in 2023 but the analysts are expecting $1.28 per share in 2024.

The implied price to earnings ratio is 7.8x – not terribly low by BDC standards.

OFS is not performing well, with a “total return” in 2024 of (13%) but still trades at more than twice its all-time low of under $4 in 2020.

Long Standing

TPVG lost investor support some time ago as more and more portfolio companies got into trouble in the venture-funded world.

We have to resort to a 5-year price chart to show that the stock began to dip in 2021 and has fallen just over (50%), including the (15%) loss this year.

On an all-time basis TPVG is close to its lowest level except for that unusual time during Covid.

The analysts are projecting TPVG will achieve a NIIPS of $1.69, which means the price-to-earnings (PE) is a modest 5.5x.

Interestingly, TPVG – partly due to a (36%) decrease in its NAVPS since the IVQ 2021 – is trading at a premium to book…

Faster

Don’t worry, we’re not going to get into so much detail with the other 7 BDCs that have dropped between (3%) and (9%) in price in 2024.

Going by their tickers, these are GECC, OCSL, PFLT, SAR, ICMB, PSEC and HRZN.

As One Would Expect

In (almost) all cases, this low level of investor enthusiasm can be traced back to the BDCs weaker-than-expected credit performance .

All are reporting percentage losses of NAVPS of (7%) to (24%) since the end of 2021 which tells the story.

(To be fair, a drop in NAVPS does not always correlate with price performance. For example, Trinity Capital’s (TRIN) NAVPS has dropped (21%) since the end of 2021, but its stock price is up 3% this year).

Not So Bad

Overall, we’d say that the 9 most egregious price underperformers discussed above have not fared too terribly. The median price drop is (7%) and if they don’t fall any further 7 of the 9 are likely to be in the black on a “total return” basis once 2024 concludes and all payouts are received.

Still, investors in the underperformers must be asking themselves if there are further shoes – and stock prices – to drop and whether trhey’s be better off in the 3x more BDCs reporting price increases this year.