BDC COMMON STOCKS
This was a curious week for the broader markets – and for the BDC sector – pulled in different directions.
At the beginning of the week, the major indices were bouncing back from global economic concerns; tariffs troubles, etc.
However, then there was the end of week hardening of the Chinese and U.S. stance and stock market prices went to heck, and bond prices rose.
Just to provide a sense of context, the S&P 500 dropped (1.44%) on the week.
(By the way and just as an FYI, the index is now down 4 weeks in a row).
On Friday alone the S&P dropped (2.6%).
In this kind of environment, the BDC sector tends to follow the broader trend, albeit with its own twist.
For the week, the UBS Exchange Traded Note with the ticker BDCS – which contains most of the BDC stocks – dropped (0.6%) on the last day of the working week.
For the week as a whole, though, BDCS was not as spooked as the major indices and closed up 0.41%.
That broke a three week losing streak.
More Up Than Down
Of the 46 BDC stocks tracked by the BDC Reporter, 25 were actually up/flat in price on the week and 21 down.
Still, there was little extreme drama in BDC stock pricing.
There were just 3 issues up 3.0% or more on the week.
Those were Newtek Business (NEWT): up 5.3%; Great Elm (GECC), up 3.5% and TriplePoint Venture (TPVG), up 3.3%.
The popularity of NEWT makes sense.
The BDC announced yet another hike in its 2019 dividend outlook from $1.95 previously to $2.15.
If achieved, NEWT will pay out 19% more in 2019 than in 2018.
Nor was the higher payout just a down the road promise.
NEWT announced a third quarter dividend of $0.58, a 21% increase over the prior year at the same time.
Market Gets Ahead
None of this was a complete surprise.
Investor bid up NEWT’s stock last year on August 20 to $24.12 on such high hopes before profit taking and the general sector decline brought the stock price to $15.18.
Since then, though, NEWT has increased by 28% as of Friday and has reached a recent high of $23.22.
The latest increase may consolidate those price gains, as chart watchers like to say.
GECC’s increase is harder to explain, but investors must be happy with the August 13, 2019 second quarter results.
Net Investment Income exceeded the $0.25 dividend in the period and allowed the unusual BDC to maintain an unchanged payout for 12 consecutive quarters.
Still, we’re not waxing too excited about GECC’s stock price, which remains solidly at a discount to book value.
Moreover, over 1 month and 12 months GECC’s stock price is down.
In the latter period, GECC is down (13.4%), offsetting any dividends collected.
TPVG has been a buyer’s darling for some time now, repeatedly hitting new 52 week and all time highs.
In August 2019 alone the stock has been at new highs no less than 4 times.
TPVG closed at $16.40, and is projected to earn $1.60 in 2019 and $1.71 in 2020.
Those are multiples of 10.25x and and 9.60x respectively.
The BDC is one of 15 trading above book, at a premium of 16%.
Surfing Analogy Coming Up
Over a 12 month period TPVG is up 24.1%, illustrating that investors who catch the right BDC stock price wave can make substantial gains in a relatively short period.
On the other hand – and to keep investor expectations in perspective – only 3 BDC are up 10% or more over the past 12 months.
ABDC is up 42% and CSWC 17%.
Another number to keep in mind for would-be BDC investors is 17.
That’s the number of BDC stocks down (10%) or more in the past 12 months, all of which have generated a varying degree of negative total return for their shareholders in this time frame.
In fact, if you leave out all the BDC stocks down in price since last year, there are only 10 stocks up in price; including the 3 winners discussed earlier.
For a BDC investor with a medium term perspective that implies only a fifth of prospective stocks are going to be winners and four fifths will result in net losses or “dead money” 0r – at best – a very modest return.
That’s why the BDC Reporter emphasizes that knowing what NOT to buy is just as important as finding the TPVG, ABDC and CSWC diamonds in the public BDC universe.
Instead of investing being termed “stock picking”, it should be renamed the clunkier but more realistic “stock picking and stock avoiding”.
Not Much New
Anyway in terms of news during the week there were very few developments.
Two To Watch Out For
We are waiting on CM Finance (CMFN) and Prospect Capital (PSEC) to close out second quarter earnings season.
The analysts expect Net Investment Income Per Share of $0.25 for CMFN in the quarter, in line with the prior quarter.
PSEC is projected to earn $0.21, also the same as the prior quarter.
CMFN is expected to modestly grow earnings per share into 2020 and PSEC modestly shrink.
The BDC Reporter has an UNCHANGED Dividend Outlook for both BDCs over the next 12 months.
However, what happens where credit quality is concerned could change that assessment.
We’ve seen a good deal of BDC credit deterioration in these past few weeks, so we’l be paying close attention to what CMFN and PSEC – both of whom have a number of troubled investments already – report.
The biggest news of the week from a BDC perspective – which affected two BDCs but could have implications for many more – is the issuance of two new SBIC licenses by the SBA.
One was to Saratoga Investment (SAR), which we discussed at length.
The other was to Stellus Capital (SCM) , which we noted but which is equally important to the BDC, although details were sparse.
On a pro-forma basis, the percentage of SBIC debt on SCM’s balance sheet – assuming no other changes – will increase from about 50% to over 70%.
(Unlike SAR and Fidus Investment (FDUS) – also a recipient of a new SBIC license a few weeks ago – SCM does not have to repay any of the debentures already on the books till 2025).
If we’re undergoing a sea change – with the SBA granting more and more licenses to BDCs which already have them or to new supplicants – that could boost the sector generally.
At least half the BDCs we track are candidates for this type of inexpensive, long term financing to support investing in the lower middle market.
With Treasury rates at very, very low levels BDCs that nab a new license have the opportunity to lock in borrowing rates at unheard of levels.
Could we see 10 year interest rates in the 2%-3% range ? Undoubtedly.
That’s as low – if not lower – than even the blue chip BDCs – often 10x larger in asset size – can borrow at.
What’s Happening ?
We say IF, because we don’t have any proprietary insights into what is going on at the SBA.
The agency has been blowing hot and cold – with an emphasis on the latter – for some time now.
The BDCs involved are too worried about being blackballed or being put into the bottom of the pile to say anything publicly, so there’s not been much of a discussion on the subject except on these pages.
More Than Cheap Money
If three licenses granted in a row is a trend – and an augury for the future – then many BDCs will be rejoicing and dusting off their paperwork.
SBIC financing helped both Main Street (MAIN) and Triangle Capital prosper through the Great Recession when many other sources of financing for BDCs were being pulled.
If the SBA comes through again, that could be the case again – although nothing is ever exactly the same – should we get another downturn.
Looking forward to the more immediate future, we’re seeing the broader non-investment grade credit markets beginning to get more selective and requiring better terms and/or wider spreads for the more speculative credits.
We commented on the subject in our Twitter feed on August 22.
That might be a temporary tightening or an indication that the markets – also with an eye on the trade wars and weaker economy – might be in the early stages of the type of seizing up we saw in the late 2018.
We won’t speculate as to when we’ll get clarity on the subject as much of what happens from here will depend on the tactics of one individual in the White House.
Instead, we’ll just have to wait and see; keeping an eye both on the headlines; the credit markets and the changing impact on borrowers finances.
(In regards to that last item, there was worrying news about slowing EBITDA growth at companies reported by a respected trade publication, which we commented on August 20, again on Twitter).
One Way Or Another- With Apologies To Blondie
We’re pretty sure that there will be eventually be a stampede – given how the markets for everything are correlated – but we don’t know in what direction the herd will be pointed.