BDC COMMON STOCKS

Week 32

Not So Bad

Going by the level of noise in the financial press you might have expected the damage this week to the major indices – and to the BDC sector – to be horrific.

Almost comically, the S&P 500 was down only (0.04%) by the time the Friday bell rang.

The NASDAQ was off only (0.2%) and the Dow Jones (0.6%).

Not So Great

The BDC sector fared worse, but nothing too drastic going by the percentage change in the metrics.

Our standard guide – BDCZ, the exchange traded note sponsored by UBS which holds most BDC stocks – was (1.8%) down,.

The S&P BDC Index – calculated only only a price basis – was down (1.6%).

Damage Assessment

This is not to minimize what for BDC investors has been a terrible fortnight.

For a second week in a row, virtually every individual BDC was down in price.

Some were down a lot.

There were 41 BDCs out of 42 in the red, including 24 off by (3%) or more.

Worst Of The Worst

2 BDCs stock price dropped by more than (10%).

Given their poor IIQ 2024 results, this was no great surprise.

The two were TriplePoint Venture Growth (TPVG) and BlackRock TCP Capital (TCPC), both down (13%) in just 5 business days.

Here’s what we wrote about TCPC in the BDC Publications News Feed – available to any interested reader and one of many such updates we published last week:

We’ll be undertaking a deeper dive shortly but at first blush BlackRock TCP Capital’s (TCPC) IIIQ 2024 results were deeply disappointing. There are other BDCs who net book value is under pressure from further write-downs of existing troubled companies. Those are regrettable but – at least – are coming to some sort of conclusion. TCPC has those plus NEW troubled companies to contend with. These include German e-commerce aggregator Seller X Gmbh – just placed on non-accrual and written down by (50%). There are more besides presumably as total non-accruals have jumped from 5 to 10. Moreover, having more than 10% of your loans not generating income is a serious problem, both for earnings and future book value. There is a big gap between what the BDC earns and pays out which makes the BDC sound stable, but it’s not. See the BDC NAV Change Table and you’ll see NAVPS has dropped (29%) since the end of 2021. The BDC is tracking TriplePoint Venture Growth (TPVG) for worst performer in credit terms but the venture debt has the excuse of a bear market in its segment. TCPC cannot say the same. Shareholders of BKCC who were folded in the recent merger into what – at one time liked the stronger of the two BlackRock BDCs – must be frustrated. Could things get worse? We don’t yet but may have a view shortly.

BDC Publications – Daily News Feed – August 7, 2024

Taking A Beating

We have not gotten around to writing about TPVG but if you look at the BDC IIQ 2024 Performance Table – now up to date with 38 BDCs having reported – you’ll see its rating was 1 on our 5 point scale.

That’s not only the lowest rating but TPVG is the only BDC to have deserved such a low score.

This was largely due to its declining earnings and the (25%) reduction in its quarterly distribution.

The new quarterly payout is $0.30, or $1.20 per annum.

The BDC’s NAVPS is now down (37%) since the end of 2021 and since the beginning of the recessionary-like conditions in the venture markets.

Turning Point?

The only good news – if one can be confident about the accuracy of the BDC’s valuation methodology – TPVG’s net losses in the period (taking into account both realized and unrealized) came to only ($4mn).

To put that into context, average losses in each of the last two calendar years – 2022 and 2023 – were ($99mn).

That may mean the worst of the damage has occurred.

Unfortunately, our sister publication – the BDC Credit Reporter – finds that management’s valuations are not a good indicator of future distress so greater losses – for all we know – could be in the offing.

Investors – always looking for a turnaround story – have almost given up.

As this stock price chart shows, TPVG’s stock price has dropped (62%) since late 2021.

Going by a different set of numbers, Seeking Alpha data indicates TPVG is the worst price performer in the whole sector over the last 3 years – off (55%).

At the moment, trading at a price of $7.21, the BDC’s just reduced $1.20 a year distribution, yields 16.6%.

Even at that lowly price, there seems to be some doubt about TPVG’s ability to sustain that payout.

The stock trades at an (18%) discount to its NAVPS.

Tough Times

There are plenty of other BDC horror stories where price losses are concerned and most of them are recent.

We remind you that as recently as early June 2024, 24 BDCs were trading within 5% of their 52 week highs and 31 within 10%.

There are now only 2 BDCs within 5% of those 52 week price records and 16 in the 5%-10% range.

By the way, for those inquiring minds who want to know, the 2 BDCs still flying high are Baring BDC (BBDC) and Palmer Square Capital (PSBD).

If Memory Serves

Just a few months ago the market was wringing its hands and shredding its garments about the defection of some of the Barings investment professionals to a rival shop.

For our part, we were relatively sanguine back In April when writing about the subject:

Nonetheless – given the manager’s huge personnel resources – this seems like an absorbable blow and that business should continue as usual for the BDC.

BDC Reporter – Barings BDC: Changes At The External Manager

We mention the above not as a quiet brag but to demonstrate how investor sentiments – or is the right word “anxiety” ? – can change drastically in a relatively small period of time.

Going Forward

We cannot say that the pullback which has seen the BDC sector fall into “Correction Territory” since its high in mid-July is over.

To paint with a broad brush, we have to admit that IIQ 2024 earnings – now almost all known – has been discouraging at times where fundamentals are concerned.

8 BDCs have reported sub-par results and by the time everyone reports that number is likely to rise to 10, or a quarter of the BDC universe.

We’re not surprised that Oaktree Specialty Lending (OCSL); Horizon Technology (HRZN), TCPC and TPVG have continued to disapoint.

The writing was on the proverbial wall.

Newbies

Unexpected, though, were bad quarters from a BDC stalwart like Golub Capital (GBDC) or household names like Goldman Sachs BDC (GSBD) or Gladstone Investment (GAIN)

Even amongst the 75% of the BDCs which are performing to plan, not everything went well.

Maybe everybody was more on edge than usual, but even one or two new non-accruals caused investors to wince more than before even as BDC managers – almost in unison – reassured anyone that would listen about how the revenues and EBITDAs of their portfolio companies continue to grow – at complete variance with the “recession is getting underway” fear that is gripping the market.

Too Much Of A Good Thing

Ironically, we sometimes feel that – in the case of some BDCs – credit performance has been so good in recent years that investors have forgotten what a “normal” level of credit setbacks looks like.

There are many, many BDCs whose percentage of non-accrual assets at cost is below the 3.8% that Ares Capital (ARCC) says is the historic BDC average.

We have not yet gathered all the data for this quarter but in the IQ 2024, three quarters of the BDCs – by ARCC’s standard – had a below average level of non-accruals.

There have been multiple new non-accruals popping up this quarter like the too-often mentioned Pluralsight; Lithium Technologies,SellerX; Emergency Communications Network and more besides.

We’ve begun to review each one in the BDC Credit Reporter for anyone interested in getting into the nitty gritty of each defaulting company.

However, in the bigger scheme of things, the on-accruals are – with only a few individual exceptions – barely a brake on BDC profitability.

Relatively Speaking

Even total BDC unrealized losses, which includes companies being added to the non-accrual list but also includes many more performing businesses not doing as well as before – are on the low side in comparison to BDC recurring earnings and book value.

We’d even guess that new capital being raised through At The Market (ATM) programs dwarfs BDC net realized losses.

We’ve Been Here Before

Investors – as always – seem to be shooting first and asking questions later just in case we’re on the verge of an upsurge in defaults and a huge drop in earnings as defaults mount and interest rates drop.

Many BDC investors may even agree with our assessment that BDC fundamentals are still pretty good but don’t want to take the chance that they are wrong.

Scenarios

If that continues, so might the now two weeks of BDC sector price retreats.

At some point, though, if prices drop enough and nothing tangible happens to economic and credit conditions, the compelling returns available for many BDC names may turn the tide.

Has To Be Said

On the other hand, if we get data that seems to confirm a recession – even a mild one – is in the cards, this recent price descent will likely continue as was the case in 2020 and 2022.

In 2022, BDCZ dropped just over (25%) from its high in late March to its nadir in late September on the fear of an imminent recession.. In 2020 – admittedly under seemingly once-in-a-lifetime conditions, BDCZ fell (55%) in a month.

This time round, we’re just one month into this renewed fear of a recession and BDCZ is off (10%) already.

Last Word On The Matter

BDC investors are now at the mercy – as they have been for a fortnight – of whatever the consensus might be about macro-factors.

Individual BDC fundamental performance – however strong – will be almost irrelevant in the short run if investors macro fears amplify from here.

Nonetheless, we’ll continue our work, letting you know what BDCs are doing right and what is going wrong because – in the long run – fundamentals really do matter.