Who’s Next ?: Clearly, the capital markets for both debt and equity are open for business where public Business Development Companies are concerned. Admittedly, there’s not been a flood of new capital raised but New Mountain Finance(NMFC) once again undertook a secondary stock offering at a premium to book value (even if that required some subsidizing by the External Manager) and Gladstone Capital (GLAD) entered into an equity distribution arrangement with Jefferies. On the fixed income side of the street, mid-sized BDC Fidus Investment (FDUS) launched a second Baby Bond not long after Saratoga Investment (SAR) piled on additional issuance to its own second Baby Bond offering, while Prospect Capital (PSEC) indefatigably continued to issue InterNotes, albeit in relatively small sizes. That’s all happened just in the month of February. Also worth mentioning – but less subject to the enthusiasms of the capital markets – multiple BDCs have been not only extending but expanding their secured debt financings, including TPG Specialty (TSLX) and Hercules Capital (HTGC).
Janus, Neustar adding more first-lien debt; PSEC, Triton Pacific hold respective companies’ second-lien credits
The secondary market commanded investors’ attention last week, what with earnings and other headline news sparking some big swings in widely held credits against the backdrop of a muted new-issue loan market and a high-yield secondary firm at three-month highs since the rebound rally in January.
Loan market participants enter 2019 looking back at a miserable December. Senior secured loans traded off the most since early 2016. BB-rated loans were trading below $96.00 for the first time in the three-year span and nearly all loans fell below par.
Primary market yields on first lien middle market loans rose to their highest levels since Q1 2017 with increases in each quarter of 2018. This movement was driven heavily by the steady increase in LIBOR of over 100 bps throughout the year along with modest increases in coupon spread, most notably in the fourth quarter. First and second lien coupon spreads widened 35 and 33 bps respectively in the quarter, marking the largest quarterly spread widening in 2 years.
Whence The BDC Rally ? : Last week, the two week long BDC rally ground to a halt. Based on the Wells Fargo BDC Index for the period, the sector pulled back (2.2%). Only 9 individual BDC companies were up in price or flat, while 37 were down. Using the UBS Exchange Traded Note which invests in most every common stock in the sector – ticker BDCS – we dropped to (6.6%) down in price terms on a year-to date basis.
It’s hard to imagine a huge turnaround coming this week, what with the broad markets all in various stages of disarray. In addition, the general leveraged loan market – a kissing cousin of the BDC sector – is just coming off its lowest price point in two years, and knocking their total return to below 4%. (The Wells Fargo Index measured comparable return for BDCs is a very close 2.8%). Then there’s the Thanksgiving break coming up with many investors more focused on turkey and family. We expect a non-eventful to lower shade on BDC prices.
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