BDC COMMON STOCKS

Week 41

Ever Higher

Not to be left out, the Dow Jones Index was up 1.2% for the week and is 13.2% higher year-to-date and the NASDAQ is up 1.1% and 22.2% over those two time periods.

Further Behind

Unfortunately, the BDC sector – which began trailing the major indices early in the summer – continues to fall further back.

The S&P BDC Index on a price basis was off (0.10%) this week and is only 1.65% in the black after 41 weeks of 2024.

Another Perspective

The picture is a little less bleak, though, if we look at BDCs “total return” – which factor in the still very high distribution levels – which is at 10.7%.

(This indicates 85% of the total return achieved by the BDC sector comes from its distributions, while of the S&P 500’s 23.25% total return only 6% is from dividends).

At this point, the BDC sector’s total return is only 46% of the S&P 500.

Look Back

As this chart shows, BDC sector prices fell out of bed right at the end of July – dropping (8%) in the blink of an eye – and have recovered only half of what was lost.

From the 2024 peak – set even earlier early in June – the S&P BDC Index on a price only basis is down (5.7%), but from highest to lowest slipped (9.7%)in two months.

The major indices – by contrast – have long ago recovered from their moment of doubt in July and moved on upward to higher ground.

This Week

Of the 42 BDCs we track 24 were up in price – or flat – and 14 were down.

There were only two major movers – i.e. (3.0%) or more – to the downside and for different reasons.

Gladstone Investment (GAIN) fell (8.5%) after the BDC paid out its “special dividend” of $0.70 per share.

Readers will remember that both GAIN and Logan Ridge Finance (LRFC) had big stakes in the common stock of portfolio company Nth Degree which were sold for a substantial gain, as discussed on these pages.

LRFC’s stock price has shot up in response even though no special dividend was paid out. GAIN’s stock price also went up but has now fallen back again.

Still, the BDC’s price remains solidly above its net book value per share and higher than its level before the Nth Degree news broke.

Repeat Offender

Down (3.35%) this week was TriplePoint Venture Growth (TPVG), which also hit a new 52-week low in the period.

The venture-debt BDC has been plumbing price depths for nearly 3 years now, including a (38%) price drop in 2024.

The BDC’s management has not been able to convince the market that the worse is over after 10 quarters in a row of lower Net Asset Value Per Share (NAVPS) and a reduction in the quarterly distribution.

At this point, TPVG’s stock yields 18.0% ($1.20 divided by $6.67 closing price). That high a yield often means the market believes a further dividend cut is in the cards.

Good-Ish

Only one BDC was up more than 3.00% in price this week.

That was Saratoga Investment (SAR), up 3.32% from Friday to Friday.

The stock closed at $23.82, but as the chart below shows reached a much higher level shortly after announcing its IIIQ 2024 results, which we reviewed on these pages.

Despite successfully removing one of its three non-accruals – a second lien loan non-performing for the past two years – by being repaid in full with proceeds from the sale of the company – SAR’s stock price gave up much of its gains after the initial enthusiasm.

Blah

This might be a comment on SAR or just the general lack of investor enthusiasm right now.

Even the sense this week amongst most commentators that interest rates might not be dropping in the near future as fast as previously expected – which is a positive for BDC earnings and distributions – didn’t seem to help sentiment any.

Maybe everyone is waiting for BDC earnings season to properly get underway in a fortnight to decide themselves which way they’re going to go.

As we’ve said before, we believe there’s a good chance overall BDC metrics across such items as portfolio size changes; earnings, credit losses, NAVPS and dividends will be better in the IIIQ 2024 than in the IIQ 2024.

If so – and it’s something of a contrarian view – will that be enough to put back some pep into BDC stock prices?

Perhaps

Maybe investors are looking further afield to the prospect of lower interest rates over 2 years or more and cannot be impressed by any short-term improvement in BDC performance.

Over BDC history – and we’ve been there almost since the beginning – there have been periods where the sector’s price has dropped for extended periods – even in the absence of an economic shock like the GFC or Covid.

Very roughly speaking, those periods of market weakness have lasted anywhere from one and a half years to as long as three years.

If that’s what we’re in right now, only four and a half months have passed so patience will be called for.

Not So Bad

BDC investors – as always – will have to take comfort from the BDC rules that require virtually all earnings to be paid out to shareholders.

In an environment of slowly decreasing BDC prices, those distributions will offset stock price erosion but only for the investors prepared to wait around to clip their coupons.