Surprising BDC COMMON STOCKS

On May 1st, the BDC sector – as measured by BDCS – dropped to $19.54. That was sharply off the $19.87 at the end of the prior week on Friday April 26, 2019.

On our Twitter feed, we noted the drop at the time and had no explanation for the mid-week slump. Maybe the market was reacting to the Fed, which had not decreased rates, as some had expected.

Yet, BDCS went on to move up in the next two days and closed the week at $19.93. That was a 0.76% increase on the week.

The Wells Fargo BDC Index went up even more: 1.34%.

Is Two A Trend ?

That’s two weeks in a row that the sector moved higher.

A plurality of BDC common stocks moved up in price on the week: 30 of the 45 we track.

Little Individuality

However, this was not an exciting time for individual stock price changes.

Only one BDC moved 3.0% or more higher.

That was Newtek Financial (NEWT), which increased 5.8%.

Investors appear to have been reassured by decent IQ 2019 results, and apparent prospects for more of same.

As recently as late March, NEWT had dropped in price to $18.50 as momentum investors bailed.

Now, investors are back and the BDC hit a new 52 week high of $24.24.

For what it’s worth, no BDC dropped (3%) or more in the week.

Pretty Much The Same

The rest of the metrics were mostly little changed from the week before.

Again, no BDC traded within 5% of their 52 week low and 17 (versus 16) within 5% of the high.

As before, 17 BDCs are at a price above book value.

In terms of the famous 50 Day and 200 Day Moving Average: in each case the number has increased by one.

That’s now 36 and 31 respectively.

Hanging In There But Falling Behind

So the BDC rally lives on after 18 weeks.

On a price basis, though, BDCS still remains below its 2019 record of $20.23, and below the 1 year high of $21.03.

Yet, over that same period, the major indices have kept moving up, leaving BDCS far behind.

For example, the Dow Jones Index is 7.1% ahead of BDCS in that period.

Price Isn’t Everything

Thankfully, if one considers Total Return, the BDC sector is doing better.

Using the Wells Fargo BDC Index – which includes both distributions and price movement – this was a record week.

On Friday, the index was at 2,717.87.

That’s the highest point all year and in the history of an index that dates back to 2011.

Since February 22, 2019 – when BDCS hit its 2019 peak – the WF Index is up 1.36%.

Admittedly, not as good an increase as the major indices, but better than the slight drop registered by BDCS.

That’s the beauty of BDC investing: even when stock prices go nowhere those dividends of approximately 10% per annum keep ticking.

Baseball Analogies Abound

There seems to be a great consensus among pundits, investors and the BDC managers themselves that the economy and leveraged lending is in the very late innings of this cycle.

Again on Conference Calls in this first week of earnings season we heard some BDC executives calling out unnamed competitors for loose lending standards and inappropriate pricing.

More than one BDC manager has waxed enthusiastic about the coming opportunity to pick up loan assets on the cheap – like in 2009 – following the coming conflagration.

Looking at the actual credit results – as we’ve done for most of the BDC names that have reported so far – reveals some slippage in quality, as more investments slip into the under-performing category.

That has been occurring even as asset values should have been generally higher thanks to better overall loan values in March versus December 2018.

Party On

Yet, the signs of decay are too modest and too unclear to dissuade investors from hanging in there a while longer.

As our weekly recaps show – especially the data about where BDCs are trading versus their 52 week lows and highs and versus book value – investors remain optimistic, but in no way giddy.

We still don’t see – especially after a very modest dividend increase from Hercules Capital (HTGC) and NEWT and none at all from Ares Capital (ARCC), Fidus Investment (FDUS), Gladstone Capital (GLAD) etc – any internal market catalyst for a Great Leap Forward where prices are concerned.

On the other hand – as the last few weeks have shown both in the BDC market and across the non investment credit space – sentiment remains constructive on higher yield lending.

For the moment, we expect this low grade upward movement in Total Return, driven principally by grinding out distributions to continue until general sentiment changes.