BDC COMMON STOCKS

Ended Well

Like a good beach novel, the BDC sector ended the summer in a satisfying manner.

The UBS Exchange Traded Note with the ticker BDCS – which is based on the Wells Fargo BDC Index – and which we use as a sector proxy, closed at $21.00.

That was 1.50% above the prior week’s end.

Support

The other metrics we use to confirm the state of the sector all suggested the BDC rally marches on.

Like last week, and the week before, 27 BDCs moved up in price or were flat, while 16 dropped.

Moreover, no BDC dropped 3.0% or more in price, but 4 caught investors fancy and moved up greater than our threshold level.

More on the Fabulous Four in a moment.

Moving Numbers

Despite a more challenging moving average to beat as prices have moved up, 28 BDCs (versus 32 last week) managed to beat the 50 day barrier.

Like last week, 36 BDCs traded above their 200 Day Moving Average.

Moreover, the number of BDCs trading towards their 52 Week Highs continued to far outpace those challenging their year long depths.

We count 25 BDCs between 0%-10% of their 52 Week peak, and only 8 up to 10% off the lowest level.

This is a pretty classic BDC rally, with relatively broad based support amongst the 46 BDCs we track.

Not Long For This World

By the way, we should note that we’ll shortly be losing a public fund as American Capital Senior Floating (ACSF) completes its liquidation.

This week, ACSF distributed a portion of its portfolio ($8.8 on August 28).

ACSF closed the week at $3.50, from $12.25.

Next to leave us will be Corporate Capital Trust (CCT) which is to merge into FS Investments (FSIC) as most readers will know.

If not, here is a link to the BDC Reporter’s July 24, 2018 article on the subject.

Growing And Shrinking

Ironically, just as the BDC sector is poised to grow in terms of total assets thanks to the higher regulatory leverage allowed under the Small Business Credit Availability Act, it is shrinking in numbers.

However, we doubt that the BDC public fund count will remain at 44 for long once ACSF and CCT are gone.

Asset managers around the country – especially those with bigger footprints – are looking enviously over at the public BDC sector and the rich compensation involved whether one succeeds or fails.

Fabulous Four

Getting back to the four big winners of the week, who we’ll name by ticker only: PSEC, MCC, HRZN, SAR.

PSEC reported annual results – as we discussed in the BDC News Table – which exceeded investor and analyst expectations.

No matter – as we discussed at great length in an article on August 31 = that the higher income might have been achieved in a controversial way.

Nor – as we highlight in our screed – that the BDC remains highly risky and much of its value lies in two carefully controlled portfolio companies.

The stock price showed that investors cared little for all that exegesis as the price jumped up 4.7% on the week.

From The Depths

Another BDC often out of favor made a price come back on increasing investor enthusiasm about its upcoming merger.

That is MCC – soon to be folded into Sierra Income along with Medley Management.

MCC’s price closed at $4.03, up 3.9% on the week.

However, there was no Proxy filed as yet and no new developments.

Although we review every BDC every day, we checked again for this article and found no new SEC filing or press release since August 16.

We expect that investors have been sharpening their pencils and hoping for the best.

At the risk of bringing forth a well worn cliche, the BDC Reporter believes the devil is in the details in this deal, which will be contained – both literally and figuratively – in the Proxy.

Why MCC investors – after witnessing a huge deterioration in the value of the BDC over several years – should suddenly expect a successful second act from the merger of 3 under-performing entities is a question we cannot answer.

Moreover, this transaction has the feeling – what with the weeks between announcement and Proxy and very little in the way of initial details – as something of a Hail Mary pass.

We shall see and report back when something turns up.

Briefly

Also up on no news was HRZN (3.6%).

Finally,  SAR increased its quarterly distribution by one cent – in what has become a regular occurrence – and was rewarded with a 3.0% increase in its price.

Looking Forward

The BDC Reporter has been mostly right on the money about the likely course of the BDC rally for the last several weeks.

In our last Market Recap – after chewing over the challenges which face the sector – we still waved our rally monkey around:

Overall, though, the BDC sector – judging by the fundamentals and leaving out the small number of Usual Suspects – is in pretty good shape and could still catch a second wind.

From where we are today, the BDC Reporter is still looking for higher BDC prices going forward.

As we stand on the brink of a new month and a new season – with investors coming back to the markets – we remain reasonably optimistic.

Besides looking at the BDC sector’s own metrics, we keep an eye on market enthusiasms in other forms of debt – both investment and non investment grade.

Many disasters have been foretold in the financial press (what else are you going to write about in the dog days of summer when nothing is going on ?).

Nonetheless, perusing prices, yields and volumes and looking over at the mountain of capital seeking to get in on the private debt phenomenon there’s little immediate reason to assume much will change.

We expect September will follow the lead of August and see – with occasional drawdowns of under 3% – the BDC sector continue its move upward.

Whether up, down or straight across the BDC Reporter will keep close tabs and continue to keep our readers apprised of where we are and where we might be headed.