BDC Common Stocks

Two Weeks Forward. One Week Back

The BDC common stock winter “rally” took some time off this week, after two weeks of upward momentum.

Once again, the BDC sector – as represented by BDCS – roughly followed the path up and down of the 3 major indices.

That involved a sharp downward roll till mid-week then a less than full upward recovery by Friday November 16’s close.

However, when all the chips were counted, BDCS fared somewhat worse than the major indices, down (1.9%) on the week.

Time Machine

That brings BDCS back more or less to the level of two weeks ago, but still higher than the price after the 5 week slump which brought the BDC sector to a 2018 nadir just before Halloween.

37 BDCs were down in price on the week.

13 of those were down by 3.0% or more.

Going Solo

At the other end of the spectrum only 1 BDC was up 3.0% or more.

That outlier was Pennant Park Investment (PNNT), which reported slightly better than earnings than the analyst community expected, and was rewarded with a 4% bump.

More And Less

Moreover, the number of BDCs trading within 5% of their 52 week lows increased again to 11 from 7 the week before and 14 at the worst point in recent weeks.

The number of BDCs trading within earshot of their 52 week high dropped from 5 to 3.

Similarly, the number of BDCs trading above book value – and most have supplied IIIQ 2018 numbers – dropped to 9 from 11.

When things were rosier in late summer that number was up to 14.

Perspective

Still, it’s always important to step back and put these sector trends in wider context.

When we do that, the picture is more complex.

Looking at BDC prices over a 4 week period, we find 21 up and 25 down, helped by that two week burst upward that ended a few days ago.

If we look at the number of BDCs whose current stock price trades over their 200 Day Moving Average, there are 16 up and 30 down.

Going Further Back

Year-to-date BDCS is down (6.6%) but was off (9.4%).

Let’s be grateful for little mercies.

According to the Wells Fargo Business Index – as charted by Market Watch – the sector is up 2.79% this year and 0.5% over 12 months.

Seeking Alpha shows us how many BDC prices are up in a 12 month period as well.

That number is 11, of which 5 are up by double digits.

Here are the tickers, but remember there’s a story that goes with each of these apparent over-achievers: BBDC, CSWC, OHAI, NEWT and OXSQ.

So BDC stock performance in the very short term has been poor, over 4 weeks just a little less poor and over a year a little better.

Tough Times

Not a Golden Year week, month or year for BDC investors, and very hard to make a buck except by successfully buying low and selling high for short periods.

That’s a skill many profess to have but few can document.

Patience Pays

The good news is that if you’d bought BDCS three years ago you’d be up 25%, or 8% per annum.

If we look at a 5 year hold period – and who in the real world invests continuously for longer ? – the total return of the WF BDC Index is 58%, or nearly 12% per annum.

One More

We’re bringing out all this return data because another public BDC has come to market : Bain Capital Specialty Finance (BCSF).

The newest BDC came to market in mid-week at a price of $20.25 with a relatively small number of shares sold.

The newbie closed the week at $18.50.

Hope Springs Eternal

Obviously – and notwithstanding the sector’s recent mediocre results – investors can still be lured into the promise of the public BDC model, notwithstanding recent results.

More About Number 46

We have read the BCSF  Prospectus after the fact due to the pressure of other BDC business and because we never invest in BDCs when right out of the oven.

Of course, we’ll have to learn a great deal more but it’s clear this new entrant is going to take a rightful place in the “larger BDC category” that we keep track of: over $1.0bn in balance sheet assets.

The Bain BDC has total assets in excess of $1.5bn, and that only tells half the story.

BCSF also has an off balance sheet joint venture with Antares Credit – into which Bain has invested a quarter billion dollars in capital and which itself has assets of $1.5bn !

Netting out the equity stakes in the JV, that suggests total assets under management by Bain are north of $2.5bn, and likely to grow from there.

Very roughly speaking that seems to place BCSF towards the top of the larger BDC category and materially boosting the sector’s total assets.

Changing Of The Guard

Where leveraged lending is concerned – and confirmed in the phone book size Prospectus – the banks have definitely left the building and BDCs – both public and private – have come to occupy many floors.

Here’s an extract from Bain’s pitch book:

According to LCD, an offering of S&P Global Market Intelligence, since 2003, bank lenders’ involvement in sponsored middle market transactions has fallen from approximately 70% to approximately 20%, with non-traditional lenders now comprising the bulk of activity. This shift is due in part to traditional bank lenders becoming subject to myriad stringent regulatory requirements, such as Basel III and the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) after the global financial crisis, which, in turn, have made it less attractive for banks to lend to middle market companies. Although the current administration has taken a more liberal stance towards the regulation of U.S. financial institutions, we do not see a meaningful resurgence of traditional bank lending within the middle market in the near future given the onerous operational and human capital demands of re-starting those businesses.

We hear that GSO Blackstone – freed from its relationship with FS Investments – is preparing a similar entry into the BDC public markets and others besides are hovering.

Add to that the up to $40bn of investments that existing BDCs – without raising a penny of new equity – might book thanks to the looser leverage standards of the Small Business Credit Availability Act and you can see that the BDC sector continues to be in a transformative state.

When we started being aware that there was such a financial animal as a BDC we could count on two hands the players involved.

Big Numbers

Look 3 to 5 years out and both BDC common stock and unsecured debt market capitalizations could be much larger: 25%-50% for the former and up to 100% for the latter.

With the addition of BCSF we’re up to 46 public BDCs, but we’re soon to lose one name – but not its assets – to the merger of FS Investment (FSIC) and Corporate Capital Trust (CCT) with the latter going away.

In a few years – which is both good news and bad news for the BDC Reporter – the number of public BDCs might exceed 50 or even 60 different funds.

At the end of the Great Recession – not that very long and after Allied Capital and Patriot Capital were gobbled up by their competitors – there were 21  public BDCs.

Growth Capital

Now the challenge for BDC managers is to generate decent returns for investors to keep this historic growth going.

If we get a recession or similar set-back in the next 12 months, the sector’s march forward could be reversed for several years – as happened last time.

If we dodge the bullet that pundits have been predicting for the last many years, BDC sector size; market share and overall importance to the non investment grade financing world is likely to grow and grow.

Your Guide

We’ll be here to provide these short term score cards and – hopefully – provide some sense of the bigger picture that’s evolving before our very eyes.