BDC COMMON STOCKS

Week 42

Incredible

The major indices continue to march on – all the doubts of Week 30 gone with the wind.

As the quote above makes clear, price records are being broken almost daily for the S&P 500 and the Dow Jones.

All Together Now

In recent months, the major indices and the BDC sector have gone their separate ways were prices are concerned, with the former leaving the latter in the proverbial dust.

“Thank-goodness for those distributions” BDC investors have been saying to themselves, generating most of the positive return for the sector this year.

Not this week.

The BDC sector moved up sharply, with the S&P BDC Index on a price basis up 1.7% and on a “total return” basis by 1.8%.

By contrast, the S&P 500 moved up “only” 0.9% in price terms.

Pretty Good

The weekly metrics all suggest a relatively buoyant market for BDCs.

Of the 42 BDCs we track, three quarters (31) were up and one quarter (11) were down.

No BDC dropped in price more than (2.6%) but 6 broke through the 3.0% weekly increase barrier.

Yes, But

We should add, though, that positioning for BDC earnings season – now just days away – may have contributed to some of the larger price increases.

The Biggest Winner this week Prospect Capital (PSEC) – up 4.33%.

As our readers will know, the controversial BDC has had a rough 2024 to date, booking huge realized losses and attracting unfavorable publicity from Bloomberg, which claimed the BDC is “bleeding cash”.

The financial magazine’s central argument in an article published August 6, 2024 goes like this:

As cash inflows have slowed, Prospect CEO John F. Barry III has resorted to bond and preferred equity sales to individual investors to make up for the shortfall and continue to make dividend payments.

We won’t be drawn into that argument, but – this week – investors were not concerned as PSEC’s price increased by 4.3% – clawing back one-quarter of the BDC’s 2024 price loss.

Funnily Enough

Ironically – and possibly not coincidentally – this price rise coincided with PSEC resuming and expanding its preferred stock sales this week.

Prospect Capital (NASDAQ:PSEC) Corporation (NASDAQ:PSEC) has amended its Dealer Manager Agreement, increasing its preferred stock offering from $2 billion to $2.25 billion in aggregate liquidation preference, as detailed in an 8-K filing with the Securities and Exchange Commission (SEC) today.

The amendment, dated today, involves an agreement with Preferred Capital Securities, LLC, which acts as the company’s agent and exclusive dealer manager for the preferred stock offering. The offering now allows for the issuance of up to 90 million shares of preferred stock, each with a par value of $0.001.

Concurrent with the increased offering, Prospect Capital has filed Articles Supplementary with the State Department of Assessments and Taxation of Maryland, reclassifying 20 million shares from common to preferred stock. This reclassification reduces the number of shares designated as common stock from 1,352,100,000 to 1,332,100,000.

October 17, 2024 – Investing.com

The BDC also issued a press release on October 15, recapping the highlights of its 2024 fiscal year investment.

Before we knew about the increased preferred stock allocation, we had this to say in the BDC Publications News Feed that you can find in the Subscriber Tools section of the website:

This feels like a pure play marketing release from Prospect Capital (PSEC). The controversial BDC is re-releasing information about its investment activity for the fiscal year 2024 that ended in June and was disclosed in late August. For a fuller picture we’d suggest investors check out the 10-K or the annual results press release.

BDC Reporter

More Metrics

Getting back to the week at hand, we also noted that 4 BDCs reached new 52 week price highs.

Not terribly surprisingly included on this short list were Ares Capital (ARCC) and Main Street (MAIN).

Both are highly popular with investors of all stripes and both are considered reliable.

MAIN helped its cause by releasing some of its results – in preliminary form – for the IIIQ 2024. In a nutshell – and as discussed at length in one of our articles this week – recurring earnings are flat from the prior quarter; non-accruals are very similar and net asset value per share (NAVPS) is up. See the BDC NAV Change Table regarding that last metric.

Coming Soon

Moreover – MAIN promises an increase in its supplemental dividend in the near future but did not disclose any specifics.

Based upon the continued strength of our performance in the third quarter, we expect another meaningful supplemental dividend to be paid in the fourth quarter of 2024. This would represent our thirteenth consecutive quarterly supplemental dividend, to go with the eight increases to our regular monthly dividends since the fourth quarter of 2021, allowing us to deliver significant value to our shareholders, while continuing to maintain a conservative dividend policy.”

(MAIN, in its own way, is also an expert marketer to its investor base, some of which explains why the BDC trades at a 76% premium to book.

Even ARCC is priced at a premium of just 10%).

Moving On

Also on new 52 week highs were two much smaller players: Gladstone Capital (GLAD) and Monroe Capital (MRCC).

Once Again

As far as we can tell, there was only one BDC reaching a new 52 week low: Horizon Technology Finance (HRZN).

This venture-debt BDC – like TriplePoint Venture Growth (TPVG) – has not fared well in the great VC meltdown of recent years as investors have lost enthusiasm for funding would-be “unicorns”.

As this chart shows, HRZN’s stock price has been gripped by a malaise since the summer of 2021 and is close to its 5 year low (excluding a brief period during Covid).

Nonetheless

Investors, though, have not fully given up on the BDC, even though its NAVPS has dropped (21%) since 2021.

The high yields the BDC receives for lending to venture-backed borrowers have kept earnings and – especially -distributions strong, which may explain why the BDC yet trades at a 12% premium to book. (More than ARCC – lol!)

We’ll be curious to see how the market reacts – if at all – to HRZN’s just announced issuance of $20mn in convertible debt. (See the article we wrote after the close on Friday).

For the record, the analyst community expects HRZN to book Net Investment Income Per Share (NIIPS) of $0.35 in the IIIQ 2024 and $1.42 for the year.

Two years ago, HRZN’s IIIQ NIIPS came to $0.43 and last year’s full NIIPS reached $1.98.

By contrast, HRZN has managed to maintain its $0.11 monthly distribution and singular $0.05 “special” this year and last.

In fact, despite all its reverse, HRZN will pay out more in 2024 than in 2022, and will unchanged from 2023.

The current yield is 13.5%.

Where We Are

While BDC investors will be hard pressed to match the performance of the major indices, 2024 could yet be a superior year.

Let’s quantify what we mean.

According to the S&P BDC Index, the average annual total return over the last 10 years has come to 8.6% and 11.3% over 5 years. Even over 3 years – which included the “a recession is coming” slump – BDCs returned 9.6% per annum.

So far this year, the total return is 12.7% already.

We’re unlikely to beat the 27.6% total return for 2023 but could yet book an above-average year.

Yes, But

As we’ve ruefully noted before there is a great deal of dispersion amongst the individual BDCs performance.

In price terms, 23 BDCs are in the black this year, 18 are in the red and PSBD does not count because of its recent arrival on the scene.

We don’t have access to YTD total return numbers for every BDC but our own back-of-the envelope calculation suggests 8 BDCs will post an overall loss and 10 will boast a total return of 20% or more in 2024.

Coming Up

A major “catalyst” will be that much anticipated IIIQ 2024 earnings season – the last one where interest rates were at their high of this cycle.

We’ve said before that we expect the number of BDCs performing to expectations or better will be higher than in the IIQ 2024 but that might be a close run thing.

If history is any guide, there may be a few October and November surprises as well.

As always, the world of private credit in a public wrapper promises to be very interesting when the quarterly reveals begin.

By the way, this week we had a look at Barings BDC (BBDC) in this context and concluded:

We have rated BBDC a 3 on our 1 to 5 rating scale – performing as expected – since the IVQ 2023 when we got started doing such things. Everything seems to point to BBDC achieving the same in the IIIQ 2024.

BDC Reporter

We will find out about BBDC – and everyone else – shortly.

As always we will updating our Subscriber Tools with the latest NAVPS; earnings and dividend performance in as close to real-time as we can as well as providing our off the cuff ratings of quarterly performance.

Nudge Nudge

If you’re not already a Premium subscriber, this might be a good time to shell out $50 a month for the most complete coverage of the BDC sector you’re going to get anywhere.