BDC COMMON STOCKS

Week 40

Contrast

There was a lot going on in the world this week – most of it horrific – but that is not the case where the BDC sector is concerned.

The BDC Reporter had so little market moving developments to comment on that we ended up writing an article about Prospect Capital’s (PSEC) self congratulatory press release about its 20 year anniversary as a public company.

Unfortunately, the BDC’s shareholders – whether in a 3, 5 or 10 year time frame – have not fared as well as the external manager or if they had invested in most other BDC stocks.

PSEC can also boast that they continue – after two decades – to charge the highest management and incentive fees of any comparably-sized BDC. Unfortunately, this was omitted from the press release.

Bits And Pieces

We covered the rest of the week’s BDC news: a couple of unchanged monthly distributions from PennantPark Floating Rate (PFLT) and PennantPark Investment (PNNT); SLR Investment’s (SLRC) acquisition of a bank’s factoring portfolio and its attendant management team and a routine amendment of one of Main Street Capital’s (MAIN) revolvers in the BDC Publications News Feed in the Subscriber Tools section on the front page of the website – a resource available to everyone.

Shocker

Probably the most important news item of the week – and nothing to do with BDCs directly – was the unexpectedly high number of new non-farm jobs created in September – and the upward revision of the August number.

In a nano second, all the loose talk about a likely 50 basis point decrease in the Fed Funds rate at the next meeting – to match the inaugural cut of a few weeks ago – went away.

Round And Round We Go

Now the debate between the cognoscenti is whether the coming reduction will be 25 basis points or nothing at all in 2024.

This continues a long term pattern that is said to go back to the Babylonians of predictions being made on the basis of the latest data point.

Given that we have almost constant updates about U.S. GDP; consumer inflation; producer inflation; manufacturing, services, trade, as well as payroll data sliced in many different ways, this constant game of guess the rate cut is likely to continue ad infinitum.

The Fed – very rightly – has made clear that they are data dependent where their decisions are concerned (what else could they be?) but that means we all are.

To The Good

Anyway – for a moment in time – the Friday employment news was propitious for the BDC sector, promising a still strong economic picture and – if you believe the more extreme guesses – a still very high interest rate for longer, keeping investment income close to record levels for months to come.

BDCZ – the exchange traded note which owns most BDC stocks – was up 0.6% for the week.

Unusually, BDCZ has increased 4 weeks in a row.

That’s the longest streak since the beginning of the year.

Nonetheless...

The rest of the data, though, does not suggest investor enthusiasm is that robust.

Slightly more BDCs -22 – were down in price than were up or unchanged – 20.

There were only two BDCs that moved 3.0% or more in price and both were to the downside.

To no one’s surprise who’s been reading this column the miscreants were TriplePoint Venture Growth (TPVG) and BlackRock TCP Capital (TCPC) – the “falling knives” of 2024.

Both BDCs also reached new 52 week lows…

Maybe as we get closer to the BDCs reporting their third quarter results some brave souls will rush in where most everyone else has feared to tread?

A Little Lower

Another favorite metric – the number of BDCs trading at or above net book value per share – dropped from 16 BDCs to 15 this week.

We’re a long way from the 22 in the black in June of this year when the BDC sector was riding high.

This is happening after a IIQ 2024 when the net book value bar was lowered, with 27 decreasing, 2 unchanged and only 13 increasing.

Trading

Like the week before, 19 BDCs are trading within (10%) of their 52 week lows but the mix of those in the (0%-5%) range versus the (5%-10%) range shifted slightly, with 7 in the former group versus 6 the week before.

Also, the number of BDCs trading within 10% of their 52 week high fell from 24 to 22.

Where We Are

There are now only 12 weeks left in the year.

As of now, BDCZ is trading up only 1.1% – way, way, way behind the S&P 500 on a historic roll – up 20.6%.

As always, BDC investors will take comfort from the BDC sector’s “total return” metric – as calculated – ironically enough – by S&P – which is up 10.8%.

The S&P 500 total return is 21.9%, leaving BDCs only way, way behind.

Still, in absolute terms, for BDC investors “buying the market” a 10.8% return is nothing to sneeze at.

Specifics

22 BDCs are in the black in 2024 and 20 in the red.

Two old investor favorites – Hercules Capital (HTGC) and Main Street Capital (MAIN) – are top of the 2024 percentage price increase leaderboard – up 20% and 18% respectively.

HTGC’s presence at the top must be encouraging to management after experiencing a vertiginous drop in price a few weeks ago when investors got ahead of themselves and pushed its price up to $21.69 on July 30, 2024.

As of Friday, HTGC is trading at $20.04 – (8%) below its peak but still top dog.

On The Podium

By the way, the bronze medal – if this was an Olympic event – goes to Monroe Capital (MRCC) – a BDC we’ve discussed a great deal of late.

Investors believe the BDC has turned the corner on its multi-year long credit problems.

We’re sorry to be a bit of a wet blanket but our analysis suggests the future of MRCC may not be as bright as investors seem to believe.

Anyone interested should read our article of September 11, 2024, written when the BDC reached a then 52 week high, which it has since passed.

Clearly, the BDC Reporter is not moving MRCC’s stock price. As of Friday the BDC closed at $8.24 and its 52 week high is $8.34.

Balanced

Overall, we estimate that about 20% of the BDC universe is beating or matching the S&P 500 in 2024 in total return terms.

At the bottom of the leaderboard, the worst performing BDC is down (37%) in price – TPVG – and 9 BDCs in all are registering double digit percentage price decrease.

That means 20% of BDC stocks are doing very well, 20% very poorly and 60% are somewhere in between.

Looking Forward

All week BDCs have been announcing the dates for their IIIQ 2024 earnings releases and conference calls.

We’ll be hearing from Saratoga Investment (SAR) next week – and then take a deep breath – before the season gets underway in earnest on October 30.

Last quarter, going by our own ratings system, a relatively high 11 BDCs performed below expectations.

10 received a rating of 2 on our 5 point scale and 1 received a rating of 1. No prizes for guessing that worst performer was TPVG.

At the moment, we’re guessing that the number of BDC underperformers will decrease in the third quarter.

We already know that Gladstone Investment (GAIN) – rated 2 in the IIQ – has that big equity gain to crow about. Great Elm (GECC) – rated 2 – has promised that its credit missteps will be largely resolved this quarter.

Maybe we’ll have more cheers than jeers when this gets going.