BDC COMMON STOCKS
Nothing lasts for ever – including BDC common stocks winning streaks – which ended this week in the red after 5 consecutive weeks in the black.
The UBS Exchange Traded Note with the ticker BDCS – which includes most of the sector’s public companies and which we use to measure price changes – was down (0.44%), closing at $20.16.
Likewise, the related Wells Fargo BDC Index – which provides a “Total Return” picture was off (1.01%).
31 individual BDCs dropped in price in the week while 15 were up or unchanged.
There was no individual BDC increasing by 3.0% or more, while there were three (3.0%) or more down.
The downers were led by newest public BDC Owl Rock Capital (ORCC), off (5.6%).
However, that had been preceded by a surge in the BDC’s stock price – for no apparent reason.
As a result, over a month period ORCC is basically flat at a 0.1% change.
Carlyle’s TCG BDC (CGBD) was off (3.0%), the minimum amount required to be listed here.
That stock has been up and down since the BDC reported some higher-than-expected credit issues for the second quarter 2019.
After a drop from a high of $15.56 down to $13.41 in mid-August, CGBD had been recovering ground, peaking at $15.09 on September 16.
For some undeterminable reason – possibly profit taking – the stock dropped back this week, ending at $14.45.
Also off by (3.0%) was lower middle market focused lender/investor Fidus Investment (FDUS).
As with ORCC, over a month period, the stock is flat.
There were no news developments we’re aware of that would have affected the stock, which is thinly traded by comparison with ORCC and CGBD, and often up and down.
The slower market conditions were reflected in how many BDCs were trading above their 50 day and 200 day moving averages.
In regards to the former, the number dropped to 21 from 31 and the latter from 28 to 22.
Even the number of BDCs trading above book dropped from the week before: from 18 to 16.
Nonetheless, taking a somewhat longer term term perspective and looking at 2019 YTD with three quarters (minus one day) gone, the sector is performing well.
As we all know, there was a big surge in the beginning of the year that peaked in late February, followed by a drop and a long plateau that seemed to foretell a further decline that reached a low in early August.
Since then, though, prices have returned to their February high – more or less.
As the Wells Fargo Index shows, the BDC sector – along with most other asset classes is up 20.79% on the year.
Sure, more than two thirds of that gain was achieved in the first 7 weeks of the year, but impressive none the less.
The bloom came off the rose this week for the BDC sector – most likely – because the broader markets fell.
The S&P 500 was off for a second week in the row and BDC stocks rarely ignore the cues from the major indices for more than a week or two.
There was little else in the BDC news stream that would have had much impact either on individual or sector prices.
As always – and despite being abroad – we’ve been mentioning the major highlights (such as they were) on the BDC Reporter’s Twitter Feed.
Most of the action was on the liability side of BDCs balance sheet.
Two BDCs issued new unsecured debt and another announced a road show in preparation for a new such issue.
Much more on the new unsecured debt issuance when we publish the BDC Fixed Income Market Recap.
We had predicted to readers that the calendar would get busy and it has.
Similarly, a couple of BDCs – in a routine way – extended and amended secured debt facilities during the week.
Up And Down
We also undertook our Stock Watch duties – when we bring to readers attention noteworthy BDC price changes.
Is it a coincidence that the former – according to our review – enjoys above average credit portfolio quality and the latter is below average ?
Looking forward – with the next earnings season some time off – we have no idea where the BDC market goes next.
Does anyone know what will happen with the Ukraine investigation or with our relations with China ?
Those seem to be the factors moving the major indices, with a knock on effect on short term trends in BDC prices.
The BDC Reporter – thanks to the work we’re doing with the BDC Credit Reporter – continues to be concerned about incipient negative credit trends.
In this regard we sometimes feel like a little lonely as most commentators in the credit space appear to be comfortable with recent credit performance and the outlook.
This week, though, we got a little company with Fitch Ratings announcing its “Loans Of Concern” for September.
As we said on Twitter, the ratings group says the value of those concerns is up 38% over the prior year.
We also couldn’t help noting that two troubled companies mentioned by Fitch are held by BDCs as well…
With the rise of the huge asset managers in recent years in the BDC space – who typically focus on larger borrowers and larger loans – BDC credit is looking increasingly like the broader leveraged loan market.
That’s good in a way as public information – outside of quarterly portfolio filings – is much more freely available about these larger cap borrowers, providing some early warnings for those listening for trouble.
On The Watch Tower
The greater flow of information is keeping the BDC Credit Reporter busy.
We added six new posts about under-performing BDC portfolio companies – all in various stages of deterioration or improvement.
Clearly there are not enough credit troubles to keep investors away – a phenomenon also in the high yield and floating rate loan sectors – but worth watching out for.
By our incomplete count there are over 250 BDC portfolio companies that are under-performing to varying degrees, accounting for over $8.3bn in investment assets at cost.
Just as importantly, that involves hundreds of millions of dollars of investment income at risk of not being collected.
With everything going on in the economic background, this is no time for being complacent even if the markets themselves – and the BDC sector is no exception – seem to be.