BDC COMMON STOCKS

Schizophrenic

In a week where BDC common stock prices should have been all about the results coming out of the first week of earnings season, there were other forces at play.

The Fed cut rates in the most telegraphed move since the invention of the telegraph itself and the Trump Administration returned to tariff wielding.

Without getting into the whys, the result was that the major indices fell out of bed – again.

The S&P 500, the Nasdaq and the Dow Jones indices were all off between (2.5%) and (3.8%).

For the S&P, this was the worst week of 2019 and all the major indices dropped below their 50 Day Moving Averages, according to CNBC.

Tagging Along

Rarely can the BDC sector – whatever its fundamentals – avoid being affected when the broader markets are headed south.

This week was no exception to that rule, with BDCS down (1.0%) to $19.54.

The “total return” Wells Fargo BDC Index was off (0.5%) as well.

27 individual BDC stocks were down in price and 19 were up.

In Both Directions

Adding to the drama was a slew of market moving new information as 13 BDCs reported results, plus the impact of two BDCs “in play” and susceptible to wild price re-adjustments.

This caused major movements in both the number of stocks increasing by 3.0% or more in the week, and those dropping by an equal percentage.

There were 4 BDCs above 3%.

At Long Last

In the case of OHA Investment (OHAI) – about to be bought by Portman Ridge (PTMN) in a generously priced deal – the increase was 23% !

We’ve often said over the past three years  “an investment in OHAI is suitable only for speculators” due to the uncertainty around a long, long strategic review by the external manager and its advisers seeking a graceful exit.

Even when OHAI dumped essentially all its material energy assets over a year ago, nothing happened and the manager refused to provide an update .

This week, though, the speculators who held the thinly traded stock seem to have won, based on that big price jump.

See the 1 month chart attached for a sense of how OHAI went:

They’re Back

Also “up big” was Medley Capital (MCC) as investors pile back into the downtrodden stock on the hope that the Go Shop initiativeunderway for 60 days will turn up a new buyer, in one form or another, for the BDC.

Even if that “fails”, a tri-partite merger with Sierra Income and Medley Management (MDLY) – the long in coming dream of the Medley insiders – would be preferred by the market to the directionless status of recent months.

This is another good vehicle for speculators, and there are plenty reading the filings and running the numbers, and probably with good reason given that MCC – at its bottom – dropped to $2.19, (40%) off its YTD high and 90% off its all time high.

The BDC is earning no income, paying no dividend and shrinking its balance sheet.

A major default on its Israeli Baby Bonds was averted only by some quiet deal doing over the phone to Tel Aviv at the possible expense of its other unsecured debt holders.

After all that, virtually anything is better, and MCC was up 19.3% this week.

Everyday

The other two major 3%+ movers were more run of the mill situations:

Triple Point Venture Growth (TPVG) reported encouraging results and went up 3.7%.

Capital Southwest (CSWC) did not report results, but the popular BDC’s stock price was probably affected by optimistic pre-positioning ahead of earnings.

We do have CSWC rated for an INCREASE in our Dividend Outlook Table.

The stock already trades at a premium to book value.

Not All Good News

On the down side, there were 7 names down (3.0%) or more.

The percentage changes were less drastic than the week’s price winners.

Three BDCs in this group were ones that reported less than stellar results, headed by BlackRock Capital (BKCC), down (6.6%).

The BDC Reporter discussed BKCC and its dividend challenges during the week.

Also taking it on the chin price-wise was Fidus Investment (FDUS) after adding a big non accrual brought on by an FBI raid on the borrower and a Chapter 11.

That was not the only trouble spot at the lower middle market BDC.

As we indicated in our Earnings Preview, the FDUS stock price tends to switch quickly from hot to cold as investors try to handicap what future credit performance will look like using the latest results.

This week FDUS dropped (6.0%), which by its historical standards, is a modest hit.

However, we’ll see what next week will bring.

Between 2013 and 2016 FDUS dropped (40%) on similar concerns – even though the dividend remained unchanged and earnings strong – so (6%) is barely a bite.

Four More

Also on our list were FS KKR Capital (FSK); Newtek Business (NEWT), Great Elm (GECC) and MVC Capital (MVC).

The first three names have yet to report while MVC reported its results a few weeks ago.

Bigger Picture

We don’t want to get caught up too much in one week’s action, although we expect similar fireworks of stock prices going in both directions in the week ahead as earnings season marches on.

From the perspective of the last few months, the BDC sector continues to trade in the same relatively narrow price channel.

Speaking in broad terms, the BDC results that we’ve seen in Week One are unlikely to move this market one way or another.

As we projected, the incipient move in short term rates shaved a little off many BDCs net earnings in the quarter and more is coming in the third quarter.

On the other hand, most BDCs are still in growth mode from an AUM standpoint thanks to the fillip of the SBCAA lower asset coverage rules.

From an earnings standpoint – and to quote John Mellencamp : “And there’s winners and there’s losers/But they ain’t no big deal”.

We did get the dividend cut from BKCC – which was predictable and predicted – but we also heard about a Special Dividend at Hercules Technology (HTGC), a higher 2019 payout at NEWT and an increase in the Barings BDC (BBDC) regular dividend.

Nothing so far – either in the broader stock markets or in the BDC sector itself – seems poised to break us out of the range we’ve been in since March.

If You Were A Buyer At New Year

For BDC investors this year has presented a tolerable enough environment if you’re been able to avoid the occasional under-performer.

In 2019 – boosted by that surge of market enthusiasm at the beginning of the year – 44 of the 46 stocks we cover are up in price YTD.

The only exceptions to the rule are PTMN and PennantPark Floating Rate (PFLT).

Poor old PTMN is down (40%) from its 2019 high and (32%) YTD, reminding us that honeymoon periods are short in the BDC world.

Whether the OHAI acquisition will cause a change of fortune we’ll review when the latest results are published.

Also headed down in 2019 has been previously high flying PFLT, although by a much smaller percentage: (13%) from its high and only (2%) YTD.

Announcing 4 new loans on non accrual in one quarter is not good for your stock price.

(Still, on a total return basis PFLT is in the black in 2019).

We’ll be watching to see how management is able to handle these reverses – all piling up together – when second quarter results are reported.

IF You Were A Buyer February 23rd

Less impressive, though, have been price movements since the February 22, 2019.

We decided a few weeks ago to begin tracking how many BDC stocks are currently trading above that optimistic period.

Unfortunately, the metrics there suggest much of the air has come out of the BDC balloon.

This week only 13 of the 46 BDCs were priced above the February 22, and of those only 8 are 3.0% or more up.

We’ll be looking at that measurement – and many others – as earnings season rolls on to see if any fundamental shift has occurred in the BDC sector.