Singing The Blues

As the lesser know Sonny Curtis song goes “We fought the tape, and the tape won”. Last week (ended October 5) , the BDC Reporter injected a note of optimism after a bad week for the BDC sector in which the Wells Fargo BDC Index dropped (1.4%). However, we’re not yet convinced that this current malaise will last all that much longer, bringing down BDC prices to correction or bear market levels. We can’t speak to general market sentiment which – as they say – is “going to do what it’s going to do”.

We’ve not yet been proven absolutely wrong because BDCS – which has now dropped to $19.40 after disgorging a $0.41 distribution – is down (7.8%) from its high. If we adjust for the dividend the drop is “only” (5.8%) and the “Total Return” Wells Fargo BDC Index is off just (4.5%). We are some way off a a classic 10% correction or a 20% haircut bear market.

Rally’s End ?

However, the BDC Reporter’s self imposed limit for calling the end to one of the BDC sector’s numerous rallies is a 5% drop from a recent top.

By that standard the BDC rally that began March 1 2018 has to be called off. Back then BDCS was at $19.05.

Blame The Markets

Of course, as anybody following the news this week will know market sentiment took a decidedly negative turn.

The prospect of higher interest rates as far as the eye can see caused investors to panic in most markets around the world.

Collateral Damage

As a host of the numbers that we track show, the BDC sector was not spared this rush to the lifeboats.

43 of the 45 BDCs we track dropped in price. Only two were up.

Over a 4 week period, only 4 BDCs can boast a higher price, 41 are flat or down.

A whopping 16 BDC stocks dropped 3% or more on the week.

The worst performers – just for the record – were NEWT (7.9%), HCAP (6.1%) and OCSL (5.7%).

We’ve not seen that level of volatility in some time.

Beware What You Say (In A Press Release)

In the case of these 3 names, only one (NEWT) had any market moving news to report.

Besides setting the date for an earnings release, there’s not been a shred of news since August about OCSL and HCAP.

NEWT – for some reason – issued a press release re-iterating its projected $1.80 2018 distribution.

However, this unusual BDC – a momentum  investor favorite of late –   also provided some wonky update about SBA loan pricing which caused investors to shudder nonetheless.

“Given the recent market conditions, the Company experienced diminished pricing on the guaranteed portions of its SBA 7(a) loans sold during the quarter ended September 30, 2018, which pricing yielded a weighted average net premium of 109.29% for this period and brought the weighted average net premium received for the first nine months of 2018 to 110.76%.  However, we have been able to offset the reduced premium income primarily through an increase in the volume of guaranteed portions of SBA 7(a) loans sold, as well as an increase in dividend income from controlled portfolio companies.  As such, we are reconfirming our 2018 annual dividend outlook.”

The stock price – which had reached an in-day high of $19.96 on October 10 dropped as low as $17.98 the next day !

That’s a (10.0%) drop in minutes.

The next day- October 12- NEWT rose back some of the way, increasing by 5.2% on more than triple the usual volume.

What was accomplished by providing this one data point amongst the very many that affect a company’s bottom line is hard to say.

Judging by the yo-yo movement of the price, investors were more confused than anything else.

Misery Loves Company

As usual we turn to how many BDCs are trading within 5% of their 52 week highs and lows for some insight into market direction.

Not surprisingly, the data was weaker with 11 trading within 5% of their lowest level, versus 8 last week.

Only 3 BDCs are within 5% of their highs, compared to 7 last week and a double digit number through August and the end of September.

Likewise, only 4 BDCs are trading over their 50 Day Moving Average and a (semi-remarkable) 16 over the 200 Day.

Last week – for those of you keeping score – the respective numbers were 7 and 30.

More tellingly, back on August 10, 2018 the numbers were 33 and 34.

Week In Review

All this slip sliding away has been unrelated to much of anything “fundamental” that’s been happening.

SAR reported strong quarterly earnings in the week (despite issuing new shares) and – according to management – their highest credit quality.

Further dividend increases from SAR – which has been doling out higher distributions one cent at a time for 4 years now – appears all but certain.

Quietly BBDC announced its second quarterly distribution since taking over Triangle Capital.

This time the payout is up to $0.10 from $0.03 and is going to go much higher as the new Investment Advisor deploys its cash capital.

MAIN also announced a distribution: the semi-annual Special Dividend which has become as dependable and depended on by shareholders as the regular monthly dividend.

Bigger Is Better

Elsewhere – for better or worse in the long run – BDCs like OFS, SUNS and SLRC have – with the overwhelming support of their shareholders – continued to prepare for bulking up their balance sheets.

SUNS and SLRC became the thirteenth and fourteenth BDCs to receive shareholder approval of the new higher leverage limits, which become immediately effective.

OFS – which 6 months ago – had only SBA debentures as long term debt now boasts two Baby Bonds as the Investment Advisor – like SAR’s eyes ever higher heights.

The Above Notwithstanding

None of that will make much of a difference to a BDC’s stock price till the current emergency is past.

This next week will be critical.

In the absence of any major market moves, we’ll be looking to see how BDC prices react.

A further downward movement will put the final nail in the coffin of the BDC rally.

A bounce upward may suggest this was a passing storm having more to do with general investor confidence.

If You Can Keep Your Head When All About You…

For our part,  our 5 year projections; discounted dividend models; loan by loan credit portfolio analysis, etc all of which  all still point to encouraging BDC fundamentals in the short to medium term.

As always there are a number of players facing difficulties, which may or may not be readily resolvable.

However, we undertake the regular exercise of pulling back from all the data and looking down the list of 45 BDCs we track and assessing the outlook for each in the next 12 months.

We allow ourselves only two categories: Good or Poor.

At the end of this difficult week we still ended up counting 39 names in the Good column.