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BDC Preview: Week of January 14 – January 18, 2019

Posted by Nicholas Marshi, BDC Reporter on Jan 15, 2019 10:30:00 AM

Market: Both BDC common stocks and publicly traded unsecured debt have been in rally mode for three weeks now.  For this preview of the week ahead, we will be looking out for any faltering in the blistering pace of the rebound in leveraged debt values. From the lowest point on Christmas Eve to the close on Friday BDC common stocks have moved up 11%. Less spectacularly, BDC Fixed Income has crossed back over par – using the median of the 41 issues we track – from a low of $24.30 in December, when nearly every issue out there had dropped below the $25.00 level. We’ll be focused on whether BDC common stock prices can make their way back – at least – to the late November level before the markets got into full dramatic mode as investors sold everything that was not nailed down, and some that was. Investors climbing that wall of worry have more than the usual number of challenges ahead including the well worn list of the government shutdown; the uncertainty over tariffs; concerns about a slowing economic environment – or worse; and the endless debate about what the Fed will or won’t do. Moreover, having climbed so high and so quickly investors have – metaphorically speaking – that much further to fall. The week ahead will be a useful test of the breadth and thrust of this rally. We take nothing for granted, and assume the next direction could just as easily be down or up. The best BDC investors might hope for in the short run is a modest pause two weeks ahead of earnings season.

No Earnings: Speaking of results, none are due yet and won’t be till early February. Throughout last week several BDCs announced their earnings release – and Conference Call – dates and times. The BDC Earnings Calendar has been updated accordingly.

Medley Capital Merger: Last week we wondered if dissident shareholders might pop up to rain on Medley Capital’s (MCC) merger into sister BDC Sierra Income and Medley Management (MDLY).  So far, we’ve heard nothing. Instead – as multiple filings have shown – MCC is busy making its case for the merger to shareholders. Calls are being made, reminders sent. We did learn – through a 13D filing – that broker-dealer LPL Financial LLC controlled 11.1% of MCC’s stock at December 31, 2018, which we noted on our very comprehensive Twitter feed. The vote is still some time away – February 8 – but nothing suggests that the merger – for better or worse – will go ahead.  The market – as reflected in MCC’s stock price – continues to be unenthusiastic, closing Friday at $2.85, only 6 cents higher than last week, and not that far off its lowest ever point of $2.59. We don’t know if there will be any new developments this week, but this story will bear watching through the vote. And beyond.

KCAP Financial Externalization:  Just as quiet has been the other controversial change going on at KCAP Financial (KCAP), which is giving up its independence and internally managed status for a one time payment to shareholders and not much else, except the promise of re-investing incentive income into shares by the new Investment Advisor. Nonetheless, the resistance here is nowhere to be seen and this transaction seems destined to occur as well.

Fixed Income Issuance:  What with the holidays and the earthquake-like conditions in the debt markets,  very little has been happening where new unsecured debt capital is concerned. Nor has there been any notable redemption in the last couple of weeks. The only exception – and a modest one – are the InterNotes issued by Prospect Capital (PSEC). We’ll be looking out this week for any signs of life. As we’ve been telling our readers for weeks, we expect 2019 to be a very active year for new unsecured debt issuance, subject to appropriate market conditions. Now the threat of much higher medium term interest rates has abated and investors seem to have accepted the leveraged lending industry is not yet headed to credit perdition – as reflected in the rallies mentioned above – the investment bankers might be in a position to raise some much desired capital. Of course, one more week without any new activity won’t tell us anything but if we do get word of some action in this space that will suggest markets and investors are getting back to business. This will be a subject all year.

Portfolio Company Credit Performance:  We’ve been using this relatively quiet period where news is concerned to continue to build our exclusive database of every BDC portfolio company news, which we search through every day. Our goal is to get as much advance notice of good news and bad – especially the latter – happening to every BDC’s portfolio investments and evaluate the likely impact when we hear from the BDCs themselves in weeks or months. The first two weeks of the year have been busy, both for performing and underperforming portfolio companies. Speaking very generally, though, there has been as much good news as bad, reflecting an LBO market studded with would-be buyers and a multitude of lenders with money to spend. That’s good news both for BDCs with troubled credits and with out-performing investments. The former are often getting repaid and restructured where at another time they might have been liquidated or sold off at a huge discount. For example, Goldman Sachs (GSBD) appears to have just dodged a bullet at NTS Communications. The still hot debt markets are also resulting in a stream of equity stakes being cashed in at a premium .  Take the hardly noticed recent Saratoga Investment (SAR) Conference Call which indicated portfolio company Health Media Network was sold in December for a $4.7mn Realized Gain. There are more of those to come at several BDCs, including Ares Capital (ARCC) and Gladstone Investment (GAIN). Just as importantly, we’re not seeing any signs of systematic credit weakening – as was the case in late 2017 and early 2018 – that presages widespread losses.

Coming Soon: We’ll be publishing our first compilations of our research into both performing and under-performing BDC companies in the form of two newsletters this coming week. We are still putting the finishing touches on the format.

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