BDC COMMON STOCKS

Week 29

Basic Instinct

Last week, at the very end of the BDC Common Stocks Market Recap, we couldn’t help ourselves and prophesied:

…While we believe there are solid arguments to be made for the BDC rally to continue – especially for the BDCs that are performing well – we can’t help feeling that a price drop is the more likely outcome.

BDC Reporter – BDC Common Stocks Market Recap: Week Ended July 12, 2024

One week later, we can report that our “gut feeling” seems to have been correct.

This week, our principal BDC stock price guide – the exchange traded note with the ticker BDCZ – fell from $20.16 on the 12th to $19.29 on the 19th – a ($0.87) per share drop or (4.3%).

To be fair, though, BDCZ did pay out a $0.446 per share dividend on July 15th.

Multiple Options

Our other price guide – the BDC exchange-traded fund with the ticker BIZD, which paid out no distributions this week – fell (1.9%) this week.

The BDC S&P Index – calculated on a total return basis – fell (1.9%), just a little less than the recently high flying S&P 500, which dropped (2.0%).

Looking Closer

The individual metrics of the 42 BDCs we track also suggest the possibility that there has been a change in market direction.

For example, only 13 BDCs increased in price this week while 29 were in the red.

2 BDCs were up 3.0% plus, but 6 were down by more than (3.0%).

Furthermore, the number of BDCs trading within 5% of their 52-week highs fell from 18 a week ago to 13 this week.

Pertinently, just 7 weeks ago, the number of BDCs in this august category was 24.

That’s quite a retreat.

Another popular metric: the number of BDCs trading at a premium to net book value per share dropped from 20 to 16 in a week.

Just 7 weeks before, the number of BDCS trading at a premium reached a multi-year high of 22.

Why Oh Why?

This week’s price downshift may represent a secular change associated with the prospect of lower interest rates and could have a long way to go, if that’s the case.

However, we’re open to other – less dire – explanations.

After all, IIQ 2024 BDC earnings season is just a few days away.

Being Careful

Maybe we’re just experiencing the regular drawdown that sometimes occur in advance of earnings releases, as investor position themselves for potentially bad news.

After all – multiple BDCs including Main Street Capital (MAIN); Capital Southwest (CSWC); PennantPark Investment (PNNT) – have published preliminary results for the quarter ended June 30, 2024, and none were particularly edifying.

Nor was the overall performance of Saratoga Investment (SAR), which reported its results through the end of May. Earnings were up, but two troublesome borrowers brought the BDC’s net asset value per share (NAVPS) down by (1%).

That’s 5 quarters in a row of decreasing NAVPS at SAR.

Maybe BDC investors are just being cautious.

Knock On Effect

Another explanation is that BDC prices are just reflecting the miasma affecting the broader markets in the last few days, confused by the assassination attempt; the uncertain political conditions; the rotation out of the biggest stocks and that global IT outage.

According to Yahoo Finance: “Both the Nasdaq and S&P 500 posted their worst week since April. The Dow Jones Industrial Average (^DJI) slipped almost 1%”.

If so, this week’s break in the BDC bull market – now 22 months long and 28% gained – will prove to be just another squiggle in the price chart.

There have been 5 others drawdowns previously since September 2022 but none have exceeded a (9%) downdraft and none have lasted even a month. That includes all the mis-placed angst surrounding the fall of Silicon Valley Bank (SVB).