BDC COMMON STOCKS

Week 33

Not For Us

Don’t believe those headlines you might have seen about how the markets round-tripped last week, returning to, or exceeding, the levels reached before the worldwide investor freak-out that began at the end of July.

That may be true for the S&P 500 and the other major indices that garner all the attention, but is not the case for the BDC sector.

Admittedly, BDC sector prices were in the black. BDCZ – the exchange traded note which holds most BDC stocks and serves as one of our price guides – did increase by 1.8%.

We also checked over at BIZD – the only BDC exchange traded fund which has a different sponsor and slightly different make-up than BDCZ – and they moved up 1.7%.

The S&P BDC Index – calculated on a total return basis – also increased 1.7% – a little less than what we might have expected.

In The Weeds

We counted 32 BDCs up in price or unchanged in the pertiod and 10 down.

Amongst the winners, 7 were up 3% or more. That’s the highest weekly number since May, but there have been other weeks with many more.

Even in this upward moving week, 3 BDCs dropped (3%) or more.

For the record those were – according to Seeking Alpha data : Runway Growth (RWAY); Great Elm (GECC) and Goldman Sachs BDC.

Thoughts

Where RWAY is concerned, maybe investors were put off by the big drop in its recurring earnings: down (22%) quarter over quarter and even more YoY? Here’s how management explained the drop on its conference call:

We generated total investment income of $34.2 million and net investment income of $14.6 million in the second quarter of 2024, compared to $40 million and $18.7 million in the first quarter of 2024. The decline is primarily a result of a decline in our average portfolio size and a prepayment at the start of the second quarter, which represented a reduction in interest income of approximately $0.05 per share.

Runway Growth – IIQ 2024 Conference Call

Related

The BDC also reported a deterioration in its credits metrics, apparently related to trouble at the deliciously named Snagajobcom.

Unfortunately for RWAY, this company represents a goodly fraction of the venture-debt’s BDC’s portfolio: a cost basis of $42.7 million and a fair value of $30.0 million. $1.9mn of interest income and OID income – according to the 10-Q – has not been received.

Shrinking

In any case, the BDC is falling behind the BDC Best Ideas NIIPS projection for all of 2024, which is $1.80 per share. The analysts had been projecting the same 90 days ago but have pulled in their projections of late to $1.72 and have marked 2025 down to $1.63.

Threat

This is putting the BDC’s dividend prospects in jeopardy. In 2023, RWAY paid out a bulky $1.81 per share – its best performance in 4 years. In 2024 to date, $1.39 per share has been paid or promised. $1.20 is in the form of regular dividends and $0.19 in quarterly specials. If RWAY just matches its IIIQ payout in the IVQ, the total for 2024 will come to $1.84 per share.

However, if profitability does not turn around soon, not only the specials but even the regular distribution might get cut.

RWAY could end up in the curious position of paying a higher total payout in 2024 than in 2023 but stumble in 2025 to below $1.60.

Out Of Favor

We’re not telling RWAY investors anything they don’t already suspect. As this chart shows, the BDC reached a new 52-week and YTD low this week of $9.87, which was (18%) below its peak of just 6 months ago:

According to Seeking Alpha, RWAY is the 3rd worst performer price-wise in the last 6 months.

Where We Are

Back to the BDC sector and where matters stand price-wise after weeks of turmoil.

BDCZ is out of “correction” territory but remains (8.5%) below its high set only 6 weeks ago. BIZD is (7.6%) off.

That’s pretty bleak but BDCs do pay out juicy dividends so on a “total return” basis – and going by the S&P BDC Index – the sector is up 6.6% in 2024.

We should be grateful for little mercies even if the total equivalent return over the same period for the S&P 500 is 17.5% – nearly 3x better…

Another Perspective

Of course, most investors don’t own the index, or even BDCZ and BIZD, but some combination of individual stocks.

If you were lucky – or a great stock picker – there were ways to match or beat the S&P.

After all, 20 BDCs are up in price in 2024, including 5 that have increased by 10% or more in the first 33 weeks of this year and 8% are up 5%-10%.

Mixed Bunch

The Biggest Winners price-wise are not necessarily those you might have expected and we’d be interested to know who has all of them in their portfolio.

Tops is Barings BDC (BBDC), up 16% and 22% when two quarters of dividends are figured in. All the earlier drama about the BDC’s parent losing some of its senior staff in the U.S. and abroad is long forgotten.

Still, BBDC continues to trade at a discount to its net book value and has 16% to go before reaching its high reached in 2021 when earnings were (28%) less than today.

Also up a great deal in price is very thinly traded PhenixFin (PFX), up 16% in 2024 and 28% in the last year.

More predictably, Main Street Capital (MAIN) has had a very good year so far. Its price is up 14% and – by our calculating – has generated a 26% “total return”.

Bottom

All in all – and after some calculator figuring – there are only 9 BDCs that are in the red in 2024 on a “total return” basis.

If prices do not change from here, the number of BDCs in deficit once a full year of distributions occurs would be 8 out of 41. (We’re leaving Palmer Square Capital, which arrived on the scene intra-year, out of these calculations).

That’s the good news.

Sad Bunch

The bad news is that the market has been unforgiving to a handful of BDCs that have failed to perform this year and the way back for them may be very difficult.

Here are the Biggest Losers by ticker which even high distributions will not save and their price change this year

There’s no mystery as to why these Hateful 8 (with apologies to Quentin Tarantino) have underperformed price-wise.

In all cases, the cause is poor credit performance.

Over the past 12 months, each of these BDCs has registered a loss of Net Asset Value Per Share (NAVPS), which aggregate (92%), or (11.5%) on average.

The average stock price drop, by the way, is (20.25%).

Looking Forward

We’re just as surprised, bothered and bewildered about the BDC price gyrations of the last few weeks as everyone else.

What happens next is a well kept secret and we have no strong feelings.

We could just as readily see BDC prices clamber back to their heights of a few weeks ago as endure a further drop.

It’s August and anything is plausible.

As always, the best insurance against getting saddled with outsized losses in the long run – short of selling everything and going on vacation – is to identify the BDCs most likely to perform well in the quarters ahead.

We will continue to do our best to point out what’s going right and what’s going wrong across all 42 BDCs in our coverage universe.

For the vast majority of BDCs, 2024 could yet be a very good year.