BDC COMMON STOCKS

Surprised

Halloween is still a month away but the broader markets were spooked this week by a series of negative economic reports.

That caused all the major indices to drop in unison for several days.

Appropriately enough, a positive payroll report (unemployment at its lowest level in 50 years !) brought investors back in.

At the end of the 5 business day period the S&P was barely down: (0.33%).

Hard Hit

The “damage” in the BDC sector, though, was far worse from this short lived hurricane of anxiety.

The sector’s price level – as measured by BDCS – dropped (3.0%) on the week, but the loss was higher in mid-week before the all clear was sounded.

There’s not been a downward weekly move such as that since the end of 2018 when prices were in free fall before their fateful recovery.

BDCS closed at $19.55, giving up 7 weeks of gains.

The Wells Fargo BDC Index – which measures total return – was off (2.6%) and has now dropped back to its level at the end of August.

Individual Efforts

A whopping 43 individual stocks were down in price.

No BDC was up 3.0% or more, but 18  (or 40%) were down by a similar percentage.

We can’t discuss all the back stories but note that the top loser was Medley Capital or MCC (5.3%), which dropped to $2.50.

Still no word on what happens next at this troubled BDC, so some investors played it safe.

In a completely different performance category is Golub Capital (GBDC), but that did not stop its stock from dropping (5.2%) to $17.90.

That leaves the price of GBDC somewhere halfway between its 52 week low and high.

Down (4.3%) for the week was BlackRock Capital (BKCC) which also broke through its 52 week low again, reaching $4.75 before slightly bouncing back.

The problem there are credit expectations, which are not good.

This week investors may have been focusing on the drop in the stock price of one of BKCC’s portfolio companies: U.S. Well Services (USWS).

That’s likely to lower the BDC’s net book value, as we discussed in a post on the BDC Credit Reporter this week.

At that lowest price, and using the 2020 analyst consensus for BKCC’s earnings, the BDC is trading at a 7.5x forward multiple.

Looking Forward

It’s hard to tell if the drop in BDC prices – now in Week Two – is just a passing phenomenon or the beginning of a more skeptical period for investing.

As always – even if the percentage of price change differed – the BDC sector remains tethered to the broader markets and whatever the machines said to be running the show are thinking.

From a fundamentals point of view there is little to move BDC prices anyway as BDC earnings season is still a month away.

(However, the BDC Reporter is preparing its BDC-by-BDC earnings preview, as we discussed in an article this week).

Little Of Note

Outside of Monroe Capital (MRCC) amending and extending its Revolver – and improving advance rates – and some expected dividend announcements (see the Dividend Outlook Table), there was little other news.

The only exception might be in the fixed income arena, but we’ll be keeping a discussion of developments there for our other Recap.

Exception To Rule

One area where we were kept busy this week covering “breaking news” is credit.

There were several leveraged companies that filed for bankruptcy, and a number of other teetering on the edge.

First of all there was the Chapter 11 filing of iconic retailer Forever 21 last Sunday.

That was followed by the bankruptcies of Bayou Steel and E&P companies Agera Energy and EP Energy.

Readers will be relieved to know that there is no BDC exposure to those names.

In Court

However, there were two additional bankruptcies that do include BDC lenders.

In Canada, Bellatrix Exploration – despite recently completing a financial restructuring – sought court protection in their equivalent of Chapter 11.

The BDC Credit Reporter wrote a long post on the subject of Bellatrix, which we’ve been following for some time.

We started to worry if the company could remain intact in its current form back on January 24, 2019.

Also filing Chapter 11 this week was Deluxe Entertainment – a post production company famous in Hollywood.

A month ago the company seemed to be in a position to work out a debt for equity swap with its lenders without the need for court intervention.

This week there was a change of heart even though the plan remains that its lenders – including 3 BDCs – become owners and pony up more capital.

Teetering

Not yet bankrupt but not paying their scheduled debt payments are two other BDC-funded coal companies: Murray Energy and Foresight Energy.

Add to that the steep drop in the USWS stock price mentioned before and the well known problems at oil services giant McDermott International, and you’ll understand our concern.

Just this little list of companies involves $267mn of BDC investment at cost and many different BDC players.

A New List

In shameful imitation of Fitch Ratings, the BDC Credit Reporter is going to develop our own monthly list of BDC Loans Of Concern, which will include any credit we believe likely to default in the next 3 months.

We think we’ll call the new list: “BDC Companies On The Brink”.

We’ve already began compiling and will share our findings with BDC Reporter readers at Halloween !

Takes Two

Between now and then we’ll be switching back and forth between tracking how BDC sector prices move (more drama ahead ?) and changes in credit results.

Whatever happens in the short term, these two are inextricably linked and deserve to be considered in combination.