Sometimes the BDC Reporter asks itself: is there any point in keeping close tabs to what is happening to the BDC sector weekly?
Is anything gained for us as investors – or for our subscribers – in this introspection and attempt to call out changes in sentiment and direction?
Could we be doing something better with our early Saturday mornings as the dawn is breaking in California?
THE PRICE OF NOT PAYING ATTENTION
The answer we always come back to is Yes. That’s bad news for our sleep but good from an investing perspective.
We’ve found over the years that BDCs tend to move in unison up and down, with the only the occasional Exception That Proves The Rule.
Moreover – as anyone who’s been involved in BDC investing for a few years – those moves up and and down can be Huuuge.
We’re talking 20%-30% or more in aggregate and even higher BDC by BDC.
And the cycles can last for years.
WHAT WAS THAT ALL ABOUT ?
Even more frustrating for investors is that the reasons for the increases or the drops can seem invisible or the big shifts unworthy of whatever the catalyst might be.
If you snooze or go that desert island hide-away you’ve always dreamed of (the one without Wi-Fi) you can return to find the whole atmosphere in the market has changed.
Even as every BDC continues the daily business of making investments and (mostly) getting repaid.
Which brings us back to this week and this cycle and we’re sensing a shift. In fact, we’ve been noting a downward drift since the end of March 2017, as we’ve remarked on before.
That accelerated with the results coming out of earnings season.
We opined last week that the market seemed to be doing its job and re-pricing under-performing BDCs as results came out.
The BDC News Of The Day has been focusing on these Falling Angels ever since earnings season began.
Then there was a post about Horizon Technology Finance (HRZN) down -12.5% and another about self-inflicted harm by Hercules Capital (HTGC) down -6% in the 1 month time frame but -23% since CEO Henriquez demanded emancipation.
Then there was the sad, continuing slide of OHA Investment (OHAI), down -14.6%, which we also chronicled.
We didn’t have time to write a post but we also noted American Capital Senior Floating (ACSF) was down -10%.
Also, FS Investment (FSIC) cut its distribution as we had warned was very likely to happen in March 2017. When the news actually came FSIC was down -7.2% in the 1 month time frame but -24% since March 1.
This week Mr Market got the jitters about some of the BDCs that have not even reported. Most notably Prospect Capital (PSEC), down -9.6%. (We told you this market can be cruel).
Roughly a fourth of the public BDCs have been undergoing sharp price adjustments. (We’ve left out a few names).
WHY WE’RE WORRIED
In a way, these significant price draw-downs (30% in a couple of days !) seem appropriate and organic.
That’s not what has us worrying as self appointed BDC Man In The High Castle.
What’s causing a frisson to the BDC Reporter is the softening of prices amongst BDCs that reported decent or even very good quarterly results and which are established investor darlings.
Advance Warning: There is no obvious “smoking gun” here in the charts. By the time that shows up we’re already off to the races. What we’re going to discuss may just be a passing summer storm. Or not.
We charted 6 beloved funds, as well as the sector Exchange Traded Note with the ticker BDCS for the last month period. Here are the tickers we used : ARCC, MAIN,GBDC, GSBD, TCPC and TSLX.
BDCS – which we’re using as a sector proxy – was down -4.3%, consistent with what we’ve been saying.
Of the Popular BDCs 4 are down, and 2 are up (those darn Exceptions To The Rule), but the path for all in the last few days is to the south.
All the Popular Six are performing better than BDCS, as you’d expect.
MARKET LEADING ?
We’re especially interested in what’s been happening to ARCC – which besides being the largest BDC – has a major institutional following. Here’s a YTD chart, and you’ll see ARCC peaked in March 2017 (that seems to have been the high month), but has since dropped by nearly -12%.
If you were excited about ARCC’s prospects back on March 1 and bought the stock at $17.87, you’ll have to wait out more than 5 quarters of distribution at the current level just to get back to even on a Total Return basis if nothing changes.
Of course, ARCC could be a one-off as Mr Market worries about the sustainability of its dividend. Or investors could be taking their chips off the table for this cycle.
There’s more to our trepidation but we look at so many stocks and charts we can’t report them all here. Plus there’s an element of “been here, seen that” to our view, but we’ve misled ourselves before.
Nonetheless, we’re officially worried that our long BDC “bull market” may be coming to an end.
Our neck is stuck out and we’ll be investing more cautiously accordingly.
There’s an argument that the downward shift has already happened. This BDCS chart shows the sector from March 31st 2017 till last Friday: down -10.4%. Isn’t that a “Correction” ?
Pull back a little more and you’ll see BDCS is trading at a level not seen since early November, 8 months ago.
We’re still up 24% from the depths of February 2016, but we’ve given up nearly a third of the gains achieved since hitting bottom.
However, the latest BDCS price when compared with the price level just before all the markets had their freak-out in early 2016 ( a real mini-panic that lasted only a few weeks, in which the S&P 500 dropped -12% and BDCS – not to be outdone- by -15%) is only -4%.
Coincidentally or not ARCC is also trading at its pre-December 2015-February 2016 Freak Out high…
BACK TO OUR REGULAR FORMAT
BDCS was down to $21.32, or -1.2% down. Year-To-Date BDCS, not accounting for distributions, is down -6.0%.
Two-thirds of that drop has occurred in the last month…
Still, 13 BDCs are trading above their 50 Day Moving Average versus 10 last week. (We told you how hard this is to call). That means,though, two thirds are trading below.
Likewise 15 (versus 10 previously) are above the 200 Day Moving Average.
LATE INNINGS WINNERS
Many of those BDCs, though, are dogs having their day. Or put differently: previously under-performing BDCs that have performed better than a skeptical market expected.
That includes Fifth Street Finance (FSC) helped by the Oaktree deal, Medallion Financial (MFIN) appreciated for just being solvent; and MVC Capital (MVC) coming off its successful subsidiary sale.
Of course, readers know we’ve covered all those stories and if you haven’t read any, they’re there in the catalog.
We’re not going to comment about how many BDCs are trading near their 52 Week Highs and Lows because the data from Yahoo Finance that we use seems flawed, so we don’t want to pass on the wrong facts.
However, just looking down our 46 BDC list we can’t help noting that there are numerous august names towards the bottom that you wouldn’t expect to see there, and which have popped up very recently.
Here are some surprising Bottom Of The Table symbols: ABDC,FSIC, HTGC, TCAP, CPTA , as well as those you might expect like OHAI.
Of course, if you’re invested in one or two (or three or four) of the BDCs that are still above their moving averages and within hailing distance of the 52 Week High (any TSLX investor for example) you might conclude all is well with the BDC “bull market” and continue complaining about how “expensive” everything is. However, that’s fast becoming a minority experience and Mr Market may be waking up soon to recognize that the winds may have changed. If so – and we’re still guessing less anyone think we’re not- historians of the BDC market (it could happen) will say we peaked in late March and started a modest slump that accelerated with the IIQ 2017 earnings season and then…
For what happens next you’ll have to watch your screens- and read the Weekly Recap- in the months ahead.
Nicholas Marshi is the Editor-In-Chief of the BDC Reporter
The BDC Reporter writes a Weekly Recap about trends in the markets for BDC common stocks and Baby Bonds for its premium subscribers every Saturday. This article is an extract from the latest update regarding what’s happening to BDC common stocks. To subscribe to the BDC Reporter’s premium service - which includes both the Weekly Recap and daily “News, Views And Analysis” of the most important industry developments, click here.