BDC COMMON STOCKS

Week 30

Positively Shakespearean

As most of our readers will know – by recent standards – the major markets went on a wild ride this week.

On Wednesday, the NASDAQ fell (3.6%) – “marking its worst one-day loss since October 2022, according to Dow Jones Market Data“.

The Magnificent Seven stocks – the popular have-to-have investments of recent years – actually fell into “correction” territory.

The S&P 500 dropped (2.3%) in sympathy and the Dow Jones – on something of a roll of late – was off (1.3%).

Storm clouds appeared to be gathering but the Friday inflation report buoyed investors spirits and all that sound and fury signified only modest changes in the indices by week’s end.

The S&P 500 fell (0.8%); the NASDAQ (2.1%) – with both indices posting two weeks of back-to-back losses, while the Dow Jones actually increased 0.8% – in the black for the 4th week in a row.

Ditto

BDC common stock prices – albeit in a more muted fashion – also swung up, then down, then up again.

We’re getting different readings from the 3 main indicators we use to measure price changes across the sector.

Our old favorite – BDCZ – increased 0.3%, while the only BDC exchange traded fund – BIZD – moved up 0.5% and the S&P BDC Index – not including dividends – moved up 1.0%.

Details

When we look at individual price changes, we find that 34 of the 42 we track increased or remained the same – the best result by this metric since late April.

With BDC earnings season right round the corner we anticipated some anticipatory price changes, and there were a few – but nothing dramatic.

Up

3 BDC moved up 3.0% or more in price.

Top of the pack was Trinity Capital (TRIN), which saw its price jump a robust 5.5%.

There was market moving news this week about TRIN that may have contributed to the mini-surge.

The BDC announced a new “strategic partnership” with Eagle Point Credit Management.

Here’s what the BDC Reporter had to say in our News Feed about this development:

Trinity Capital (TRIN) alongside Eagle Point Credit Management are launching what is – at the moment – a relatively small potatoes new fund that might eventually turn into a private BDC. However, the launch does – once again – underscore the broad ambitions of the BDC’s principals, who have growth initiatives on all fronts. As an internally managed BDC any gains TRIN might make in this endeavor will benefit its shareholders rather than an external manager, which is a Good Thing. However. the obvious demurral is that this initiative – and all the others – have to be successful. It’s too early to tell if TRIN will become the next Hercules Capital (HTGC) or will be trip itself up trying to run too fast too soon. The market remains unconvinced at this stage with TRIN trading closer to its 52 week low than its 52 week high. We should note, though, that our sister publication – BDC Best Ideas – is constructive on the BDC’s long term prospects and believes a total return well in in excess of 100% can be achieved over the next 5 years.

BDC Publications News Feed – July 23, 2024

Getting Ahead

More obvious price pre-positioning occurred for Oaktree Specialty Lending (OCSL) – up 4.2% – and Monroe Capital (MRCC) – up 3.2%.

Both BDCs have been underperforming where fundamentals are concerned, which has translated into sub-par prices.

As of July 19, 2024 OCSL was trading at $17.63 – its 52 week low. A week later, the BDC is up to $18.41 but that’s still (15%) below its 52 week high and below its net asset value per share (NAVPS).

On the other hand, OCSL is hardly “cheap” – a very subjective matter admittedly – trading at 8.1x its projected 2024 Net Investment Income Per Share (NIIPS).

Our sister publication – BDC Best Ideas – seeks to track price-to-projected earnings for almost every BDC and calculates that the current BDC average is 8.5x.

What happens next to OCSL’s stock price has everything to do with the quality of its IIQ 2024 earnings, coming on August 1, 2024.

Self Quote

This is what the BDC Reporter said in an article on July 18th, 2024 when OCSL reached that 52 week low:

Right Now

By our standards, OCSL’s credit performance is BELOW NORMAL and could yet get worse.

On the other hand, the BDC is managed by a famous and reputable asset manager which has proven its ability to restructure numerous troubled companies.

Debt to equity is modest, leaving room to grow earnings by adding new assets even if losses cause some loans not to get paid.

Mild

To date – despite reaching today’s 52 week low – one could argue investors have not punished the stock very much.

OCSL is trading at a still high-ish 7.8x multiple of its projected fiscal year ANIIPS and at a not-so-dramatic (5%) discount to net book value.

This suggests the market is taking a measured approach to the BDC’s challenges.

The question everyone must be asking themselves is whether this tempered approach will subsist if losses continue to mount and NAVPS drops even more.

OCSL’s IIQ 2024 results – especially on the credit side – will need to be watched carefully.

BDC Reporter – Oaktree Specialty Lending: New 52-Week Low – July 18, 2024

Long Time

MRCC has been under-performing for some time. Its stock has been in decline since November 2021, losing a third of its value.

A week ago, MRCC traded at $7.44, 11% above its 52 week low but (16%) below the corresponding high and (20%) below NAVPS.

Understandably, the market hopes for a turnaround. At the latest price of $7.69, MRCC trades at a Price to Earnings multiple of 7.6x.

MRCC has paid the same $0.25 quarterly dividend for 17 quarters in a row. That’s offering brave souls a 13.0% yield – way above the BDC average.

Is that fool’s gold or good value from an under-valued BDC turning its fortunes round?

We’re not qualified to say but the very question makes the IIQ 2024 results very intriguing.

The analysts expect the BDC can earn $0.26 per share so maybe the narrow margin between what MRCC earns and pays out to its long suffering shareholders will continue a while longer.

What happens, though, when interest rates – universally expected to begin a downward descent in two months – begin to decline?

Coming Up

Investors – and the BDC Reporter – are bracing themselves for BDC earnings season which begins in mid-week with Ares Capital Capital (ARCC) and Horizon Technology (HRZN) – two very different BDCs who both like to report early.

Briefly

There are 8 BDCs getting ready to open their kimonos.

We don’t EXPECT any great surprises from ARCC, Sixth Street Specialty (TSLX); Hercules Capital (HTGC) and even Fidus Investment (FDUS).

Nor do the analysts – who are projecting earnings in the second quarter within a cent or two per share of the prior quarter.

All posted higher NAVPS last quarter compared to the IVQ 2023, except for FDUS which was an immaterial (0.1%) down.

All these BDCs have troubled performing companies to contend with but that’s to be expected.

Question Marked

More problematic are HRZN, New Mountain Finance (NMFC), OFS Capital and the previously discussed OCSL.

Relentless

Venture-debt BDC HRZN has endured 7 consecutive quarters of lower NAVPS – with NAVPS (18%) down overall. Will eight be the charm?

The BDC Credit Reporter has only identified 2 significant under-performing companies on HRZN’s books as of March 2024.

Unfortunately – as the last couple of years has clearly demonstrated – HRZN’s borrowers can go from heroes to zeros very quickly so we don’t know how many of the 52 companies not in dire straits last quarter might have transitioned. If any.

Not Good Enough

NMFC ‘s streak of lower quarterly NAVPS is less dire than HRZN: 3 in a row. But that has weighed on the stock price, which is trading closer to its 52-week low than its high and is below its NAVPS.

The analysts are expecting earnings to be $0.36 per share. In the last two quarters of 2023, NIIPS were $#0.40 both times.

Can NMFC book both higher NIIPS and NAVPS and – possibly – cause a reversal in its stock price direction – off (4%) in the last 6 months and (2%) YTD?

Hope Floats

OFS – more than any public BDC right now – will be hoping to turn the tide.

In 2024 YTD, OFS is the worst performing stock – down (26%).

Last quarter, the BDC saw its NAVPS drop (8.4%) – the worst performance by any BDC. Since the end of 2021, NAVPS is down (27%).

This is not a sustainable rate of loss for any BDC so shareholders will be relieved to see even a decrease in the velocity of loss.

To be fair, most of the recent unrealized losses were in the BDC’s equity investments and not in its fundamental earnings power.

Just Asking

Like TriplePoint Venture Growth TPVG) recently will bargain hunters come a-knocking?

As of last Friday, OFS was priced at $8.64 and its price-to-expected earnings was a low-ish 6.8x and its yield was 15.7%. – the best one out there and way above the 11.3% yield estimated by BDC Best Ideas.

Those are all the ingredients necessary for a come-back story…

Last Word

There are as many interesting story-lines as there are BDCs.

Saratoga Investment (SAR) is the only BDC to have reported results for the IIQ 2024 as yet with its February-May 2024 numbers.

Despite booking yet another quarter of lower NAVPS, the once most profitable BDC managed to convince investors that the worst was over with its trio of non-performing companies and has seen its stock price increase 4.2%.

This mixture of historic and current performance as well as of investor expectations is different for every BDC and in what should otherwise prove a routine quarter could still cause sparks to fly over the next few weeks.