BDC COMMON STOCKS

Week 37

Enough Said

The quote about says it all: the markets are in a very “volatile” period. That’s another way to say investors cannot decide themselves about what the way forward and are unduly influenced by every new data point that shows up on their terminal.

Nor is this likely to end with the upcoming Fed meeting and the almost certain first reduction in the Fed Funds rate.

The uncertainty is principally about the future performance of the U.S. and global economy – and less what about the Fed will do or not do – and there is no decisive single economic indicator that will foretell the future.

In Any Case...

The BDC sector joined in the general market volatility.

BDCZ – the exchange-traded note which owns most BDC stocks and our go-to sectoral price guide, shot up 1.8% – its best percentage change in 4 weeks – to reach $18.96.

(By the way – and to underscore recent price volatility: since BDCZ peaked in 2024 at a price of $20.24 on July 12, 2024, the ETN has been down 4 times and up 5 times at week’s end).

The prior week, BDCZ was down (1.6%).

This week, though, just about every BDC’s stock price was in the black: 41 out of 42.

Interestingly, that’s the highest number we’ve recorded since June 2023.

However, the percentage price increases were mostly modest.

Five BDCs moved up 3.0% or more in price and 1 fell more than (3.0%).

Tops

The Biggest Winner was Logan Ridge Finance (LRFC)

The former increased in price by 11.1% following the news of the sale of its equity positions in a portfolio company for a pretty penny.

The BDC has been arguing for a long time that its earnings would eventually climb when its outsized percentage of non-income producing equity investments (19%) of the portfolio at FMV) would begin to be sold and converted into income-producing loans.

In this case, the equity investment was in a company called Nth Degree, on the books since 2015, which accounted – as of the IIQ 2024 – for 42% of all equity investment assets.

LRFC also has an investment in a company called Burgaflex, valued over $6mn still to be cashed in but Nth Degree was the most important one and has now been cashed in.

We discussed the potential impact on LRFC’s earnings power of the just-announced transaction in a just-penned article.

Different

Otherwise, the 3.0+ plus percentage price changes in Prospect Capital (PSEC); Hercules Capital (HTGC); Carlyle Secured Lending (CGBD) and Goldman Sachs BDC (GSBD) occurred without benefit of any triggering news.

In The Red

Falling in price were Great Elm Capital (GECC) – down (5%) – and Saratoga Investment (SAR).- down (4%).

In the case of the former, the stock is going ex-dividend on Monday and one of its Baby Bonds at a yield of 6.75% is about to be repaid from the proceeds of a new debt issue costing 8.125%.

Presumably, investors did the math and shaved the stock price accordingly.

SAR went ex-dividend on September 11, paying out a $0.74 dividend, which probably accounts for its price drop.

Where We Are

At this point BDCZ sits (6.3%) off its 52-week high of just 2 months ago, but has regained about half of its loss that saw the ETN drop to a $17.94 close on August 5.

23 individual BDCs are up in price in 2024 (including PSBD) and 19 are down.

The S&P BDC Index – calculated on a total return basis – is 9.3% ahead in 2024.

Admittedly, that’s half the increase of the S&P 500 over this period, but not too bad except for the most demanding investors.

For a third week in a row, 14 BDCs are trading at or above their net book value per share.

Where We’re Going

Given the recent price volatility, we’re even more unwilling to project what will happen to BDC prices next.

All we have to offer are some musings.

In The Cards

First, the upcoming IVQ 2024 is likely to be the first quarter in several years that BDC loan yields begin to drop.

Whether the Fed cuts rates 0.25% or 0.50% – the debate of the moment – the immediate impact on BDC earnings in the last quarter of the year should be modest.

BDC Best Ideas still projects that at least 7 BDCs will report higher recurring earnings in 2024 than 2023.

However, the lower rates may have a psychological impact on BDC investors and even BDC managers, planning out future dividend announcements, even though this was all in the cards for a long time.

At Risk

Second, the price drops of the last few weeks have made clear that BDC stock prices are vulnerable to any news that appears to portend a recession of any size.

Very roughly, “vulnerable” equates to a POTENTIAL (10%) to (20%) pullback – going by what happened in 2022 when the consensus was that we were on the way into that dark night.

All In All

Third – and a more positive note – BDC fundamentals continue to be pretty good across three-quarters of the BDC we track. We refer you to the performance ratings in the BDC Reporter’s Investor Tools section for the first two quarters of the year.

Famous and less famous names like Ares Capital (ARCC); Blackstone Secured Lending (BXSL) and Stellus Capital (SCM) are motoring along, performing well within expectations.

Furthermore, there is some hope that amidst the BDC underperformers some sort of bottom has been reached. The IIIQ 2024 results will be very instructive for BlackRock TCP Capital (TCPC; Horizon Technology Finance (HRZN); Oaktree Specialty Lending (OCSL); Prospect Capital (PSEC) and TriplePoint Venture Growth (TPVG).

Gladstone Investment (GAIN);Golub Capital (GBDC) and Great Elm Capital (GECC) – all coming off disappointing second quarters – have the opportunity to prove themselves. Monroe Capital (MRCC) – long in the dumps – may be on the point of a turn around, going by its recent price.

A little bit of good news – as LRFC has just proven – can go a long way and if enough BDCs get in the act, the sector as a whole may benefit.

Even though IIIQ 2024 earnings season is still 6 weeks away, we’re getting excited to see how these BDC storylines play out.