All Together Now
The week was not a good one for the major indices, all of which were down in the period. The BDC sector was not spared, with both indicators we use for price and total return in the red.
The UBS Exchange Traded Note, which includes most every public BDC – with the ticker BDCS – was off (0.25%). Likewise, the all-inclusive Wells Fargo BDC Index was down by (0.74%).
Thirty one individual BDC issues dropped in price, and just fourteen were unchanged or increased. The week before 28 issues had increased in price and 37 the week before that.
One And Only
Of the BDCs increasing in price only one went up more than 3.0%.
That was PennantPark Investment (PNNT) – which had been out of favor of late – but suddenly caught a market wave.
On the week, the increase was 4.1%, but at one point the stock was up even more, before settling down by week’s end.
The volume of PNNT traded on Tuesday was 6x the average level.
We’ve been asked by at least one reader why there was this sudden – but unsustained uptick – but our guess is as good as yours.
There may have been an institutional buyer building a big/bigger position, or it could be sun spots.
Still, despite the one day boost PNNT, which traded as high as $7.34 in February of this year, closed at $6.55.
That’s a drop of (11%) in less than six months.
The Reason Why ?
That drop, though, is explainable:
PNNT had been posting improved earnings, book value and credit results through 2018, but disappointed shareholders with its IQ 2019 performance.
Book value per share dropped; a new loan went on non accrual and -most of all – the BDC’s portfolio turnaround sputtered.
Some investors presumably threw in the proverbial towel, dropping the stock price down as much as (17%) at one point.
What PNNT reports IIQ 2019 results on August 7 – see the BDC Earnings Calendar for the details – may cause major movements.
From our own research, we know that the new non-accrual in the IQ 2019 – Hollander Sleep Products – actually filed for Chapter 11 bankruptcy in May.
That may not have been unexpected given the payment default but the first lien debt was valued at $17mn, only a (12%) discount off cost as of March 31, 2019.
Will there be a further write-down and a write-off that would hit net book value ?
We think so given that the mattress manufacturer is talking about converting two-thirds of its existing debt to equity and requiring a major ($118mn) new loan from its existing lenders to keep going.
However, the debt currently trades at a (14%) discount, not that much worse than at 3/31/2019, according to Advantage Data’s up-to-date records.[The outcome will also affect PennantPark Floating – PFLT – which has $10.8mn in the same first lien debt].
We also know PNNT has a small position in the common stock of U.S. Well Services, and that investment has dropped sharply in the public markets since the end of the first quarter.
Still, there are several other under-performing investments that we have no fresh information about and could go either way.
Two BDCs dropped more than (3.0%) on the week.
OFS Capital (OFS) dropped (6.1%) and FS-KKR Capital (FSK) was off (3.2%).
From The Archives
Frankly, we’ve been concerned about the OFS credit picture since May 6, 2019 when we revised our Credit Outlook from OKAY to POOR.
At the time, the stock was trading at $12.40.
As if to demonstrate that the market does not listen to the BDC Reporter, the stock price moved up in the weeks that followed to a high of $12.80 on June 19, 2019.
Since then, though, the OFS stock price has dropped (12%) to $12.26.
This in spite of the BDC announcing a new financing arrangement to support an ambitious increase in assets under management, but principally of lower risk-lower yield senior loans.
We also discussed that development on these pages in a June 26, 2019 article.
There’s been no other news since to move the OFS needle.
Just A Theory
We’re guessing the market may be circling back to the credit issues we raised earlier in advance of IIQ 2019 results.
No date has yet been set for the release, so the stock may continue to fluctuate for some time.
By the way, OFS could end of dodging its credit concern bullets and the stock price could jump up.
Under A Microscope
We’ll also be watching with above average interest what we hear about credit conditions at FSK.
The earnings release date there is set for August 7.
More so than what happens to earnings will be the state of the huge BDC’s investment portfolio, which has been been – along with 10 other BDCs – in turnaround mode since KKR came on board.
We’ve talked to the senior credit managers at FSK whose resumes and experience are first class and have no doubt any problem credits are being addressed.
However, leveraged lending can be a humbling occupation at time and the BDC continues to have inherited a significant proportion of their assets from GSO Blackstone.
Again, we’ll know a great deal more shortly.
Getting back to the week’s data, most of metrics we look at were flat or slightly weaker.
As before, just 14 BDCs are trading above book value (15 if you count new public player Owl Rock Capital, with the ticker ORCC).
That means 31 are trading below book.
Also the number of BDCs trading within 5% of their 52 week high is down from 11 to 8.
That’s half as many as two months ago.
Furthermore, the number of BDCs trading above their stock price on February 22, 2019 – when the sector peaked – dropped to 12 names from 14 the week before.
That’s nothing very dramatic, but taken in toto, the data seems to suggest weakening sector price momentum of late.
BDC Normal ?
However – as we’ve been saying for several weeks – this may just be the normal to-ing and fro-ing in advance of BDC earnings season, which begins July 30.
Till then, our expectations for a clear sense of where the BDC is headed are muted.
With 40 BDCs having adopted the SBCAA; 11 BDCs in turnaround mode; 18 re-positioning their portfolios; and 6 involved in M&A or “shareholder activism” (there are BDCs in multiple categories) there are many variables than can affect BDC results in unexpected ways.
This will make this quarter’s BDC earnings season, which lasts for a couple of weeks, one to bear watching.