BDC COMMON STOCKS

Week 34

Remarkable

For the week, the Dow Jones average jumped nearly +1.3%, the Nasdaq Composite added +1.4%, and the S&P 500 gained +1.5% after all three benchmark indexes gained more than 1% on Friday, and the Dow Jones and S&P scored their second-highest closes ever.

Seeking Alpha- Bull Market – August 24, 2024

From the headline above, you’d never know that just a few weeks ago all the major markets were freefalling all over the world and many pundits – now gone quiet – were predicting more of the same.

No So Scot Free

The BDC sector – which followed the main markets down – are also participating in the rally – but only up to a point.

Whereas the S&P 500 has recovered all but (0.6%) of its losses incurred since mid-July, BDCZ remains (7.1%) behind.

This week BDCZ was up 1.1%, but there’s a lot of ground yet to be made up.

Even the S&P BDC Index – calculated on a Total Return basis (inclusive of dividends received) – remains (3.9%) below its July 2024 high point before the markets went berserk.

Impactful

This lingering damage in the BDC sector is also reflected in how the 42 BDCs we track stand price-wise.

Just a few weeks ago, BDCs were reaching new 52 week highs all the time.

There were none reaching that sort of bull market peak this week.

In early June, 24 BDCs were trading within 5% of their 52 week highs.

This week closed with only 7 close to their top price.

In alphabetical ticker order, the Still Successful Seven are ARCC,BBDC, BCSF, CION, FDUS, PFX and PSBD.

Left Out

You’ll notice that NOT on that eclectic list is Hercules Capital (HTGC) whose price increase was recently going gangbusters until it wasn’t. As this price shows, HTGC’s price has fallen and not been able to get back up:

Telling

Also in early June 22 BDCs were trading at or above their net asset value per share (NAVPS). Now that number is down to 13. See the BDC NAV Change Table.

Let’s face facts: the last month has been terrible to BDC investors.

According to Seeking Alpha data, 36 BDCs have recorded lower prices in the last 30 days and only 6 are in the black. Even the latter are barely up. Fidus Investment (FDUS) leads the way with a 2.2% increase since late July.

Where We Stand

BDCZ at a price of $18.72 is (7.5%) below its 52 week high set in June and is off (1.3%) in 2024.

The S&P BDC Index on a Total Return basis is (4.5%) off its 52 week highest level but is still up 7.6% for the year.

Of course, in absolute terms that’s a pretty good return after nearly 8 months but BDC investors will remember wryly that for several weeks the total return could be counted in double digits and was annualizing at over 20%.

At this stage, 23 BDCs are in the black price-wise in 2024 and 19 in the red.

Happy

8 BDCs are having a Pretty Darn Good Year: up 10% or more in price and thus potentially capable of posting a total return that’s in the same vicinity as the S&P 500’s total return YTD of 22.1%.

Top of the list is Barings BDC (BBDC), up 18% in price alone and something of a surprise as number one.

Less surprising at number two is Main Street Capital (MAIN), up 16% in 2024. This year, the highly successful lower middle market focused BDC reached new all-time price heights.

BDC Best Ideas projects MAIN could pay out $3.81 a share in 2024 – even more than the record breaking $3.70 in 2023. Even that projection may prove too low.

Up 15% this year is tiny PhenixFin (PFX), which inherited what remained of Medley Capital’s portfolio and has yet to return to paying a regular distribution.

Both Sides Now

Coincidentally, there are 8 BDCs having a pretty awful 2024, with a stock price down (10%) or more.

In virtually all cases, the apparent reason for the price decline is poor credit performance.

Not News

Leading the field is OFS Capital (OFS), down a stunning (31%) in 34 weeks – or nearly a percentage point a week.

The BDC has seen its NAVPS fall (5%) in 2024 and (11%) in the past 12 months.

Although OFS seems likely to pay out $1.34 a share in 2024 – unchanged from 2023 – investors must be worrying that a cut is in the cards.

The analyst earnings consensus for 2024 is $1.17 per share and $0.92 in 2025.

If the analysts are right – and when are they ever wrong? – the math seems inescapable, even if OFS has some undistributed taxable income to fall back on.

Rough

Also taking 2024 on the chin is TriplePoint Venture Growth (TPVG) – a venture-debt BDC of great promise that got caught on the shoals of changing valuations for early stage companies. TPVG’s price is down (32%) and its dividend has already been reduced by (25%).

The list of wrong headed investments that are – or were – on the BDC’s books – is very long and damning. However, one shouldn’t forget how much enthusiasm – and equity capital – supported these companies a few years ago. Many companies saw their valuations reach a billion dollars – on paper – yet ended up worth next to nothing. One can sympathize with TPVG – as well as Horizon Technology Finance (HRZN) caught up in a similar fashion. Who could have imagined that what seemed so valuable would lose almost all its shine – and so quickly.

Unfortunately for the shareholders of both TPVG and HRZN – whose NAVPS has been shrunk by a third and a quarter respectively – we don’t get the impression that the BDCs managers acknowledge that their investing strategy might be flawed and that another approach might be worth trying.

Different Market. Same Outcome.

Down (19%) and (17%) in price respectively are BlackRock TCP (TCPC) and Oaktree Specialty Lending (OCSL) following a string of credit losses. Both BDCs have recognized losses in just 6 months of about ($110mn) each. TCPC’s NAVPS has shrunk (29%) since the end of 2021 and OCSL (17%).

The famous name asset managers of both BDCs contend the losses are “idiosyncratic” – a term much over-used. As with their venture debt counterparts, there does not seem to be any acknowledgement that such a level of losses is worrisome, especially as overall credit conditions have been relatively favorable in recent years. What will happen if we finally do get the long threatened recession?

Big Picture

With all that said, at the two-thirds of the year, we surveyed our BDC universe and came to the conclusion that 31 BDCs – i.e. three quarters of the total – are performing well – or well enough.

That leaves 11 who are performing – by our lights – poorly and in need of a turnaround.

We’ll be interested to see how the proportion of good to poor performers changes – if at all – by the end of the year.

How that plays out may have much to do how the BDC sector as a whole performs price-wise in 2024, with 18 weeks to go.

Going To Extremes

In any case, we expect that this will be a very sweet and sour year where BDC price performance is concerned, with some BDCs posting excellent total returns and others deeply in the red.

Investor satisfaction will depend very much on which BDCs they’ve chosen.