Concession Speech

We are prepared to concede that the once semi-robust BDC common stock rally is in stall mode.

Another week has passed, and the UBS Exchange Traded Note which covers most every public company in the sector (ticker BDCS) was largely unchanged in price.

This week BDCS closed at $20.75, down from $20.79 the week before.

Even more illustrative is this 4 week BDCS price chart:

Four weeks have passed and BDCS is only o.4% changed – for the (slightly) better.

We double checked with the Wells Fargo BDC Index – on which BDCS is based – and found an identical 0.4% change.

Supporting

Much of the other data supports a BDC sector caught in limbo.

Out of 45 public BDCS in our coverage universe, after we dropped American Capital Senior Floating (ACSF) from our list, 22 are trading at or above their 50 Day Moving Average and 23 below.

If we use the 200 Day Moving Average, there are 32 trading above the line versus 35 four weeks ago.

The number of BDCs trading within 5% of their 52 Week Low is still just 4, versus 3 a month ago.

The number of BDC stocks trading within 5% of their 52 Week High is also consistent: 14 in both time periods.

Another useful metric is how many BDCs are trading at book or above.

A month ago there were 14, and this week only 1 less than that.

Narrow

Basically, the BDC sector – when we look at the BDCS chart for inspiration – has been trading in a very narrow range of less than 5% (from highest to lowest) since August 1, 2018.

We’ve had lulls like these before and never been able to determine  in advance if that means the market is just catching its breath before continuing its upward trek or is about to slip down the mountain.

Baskets In Hand

What we can say is that there is still a good deal of “price discovery” going on.

By that we mean, many individual BDC stock prices  are moving around substantially from week to week as investors shop around.

This week there were 4 BDCs that moved up more than 3.0% in price: WHF, ABDC, KCAP and HRZN.

Little To Report

As if often the case, there was very little in the way of “market moving” news about most of these funds.

Of course, the BDC Reporter tracks every BDC every day, so we can say the above with some confidence.

Nonetheless we used the very comprehensive financial news service we’ve just subscribed to and checked if we’d missed anything earth shattering this week.

We found nothing except the Definitive Proxy for HRZN, seeking shareholder approval of higher leverage.

However, a draft Prospectus had already popped up the week before, so this was hardly breaking any new ground for investors.

Much About Little

We’re not making too much of these one week wonders.

Very often a surge in a BDC’s price during this quiet period between earnings seasons is followed by a price pull-back the week later.

For example, only one of the BDCs up this week is also on the list of BDCs that are up 3.0% or more over the last 4 weeks.

The common BDC is HRZN and the others are OHAI, PSEC, TSLX and MCC.

In any case, the fact that there are only 5 BDCs that have moved 3.0% or more higher over a month only underscores how quiescent the market has been of late.

We should add – not to detract from our point – that were also 3 BDCs down 3.0% or more this week: GECC, NEWT and TCRD.

Over a 4 week period, there are 7 names 3.0% or more in deficit.

Still, that means in total 12 BDCs have bopped up or down in price over the past month (5up, 7 down) but another 33 have hardly shifted.

Looking Forward

We’ll stick with the party line of these past few weeks and project that we still expect BDC prices to move higher in the short term.

Or, at the very least, remain in this narrow channel a little longer.

Short List 

With rates moving higher; leveraged loan spreads stabilizing (somewhat surprisingly given the Wall Of Money in the industry) and BDCs beefing up portfolio sizes (or getting ready to do so) there’s no obvious trigger for a negative change of sentiment.

Moreover, we are keeping increasingly comprehensive track of all the BDC portfolio companies out there – especially those which have been under-performing – and can report that credit quality appears to continue to be strong.

Our Eyes Are Open

We have no doubt that many otherwise troubled loans are held together by generous lender terms and a “look the other way” ethos.

It’s also generally understood that covenants and other lender protections are at all-time lows for all leveraged loans.

However, BDCs do not seem to be anywhere near having to pay the piper for years of borrower friendly market conditions.

This will change at some point, but there’s no evidence – as yet – to suggest that we are in anything other than a “business as usual” environment.

By: Nicholas Marshi
The BDC Reporter