May You Live In Interesting Times
BDC Fixed Income – which most of the time is as exciting as watching paint dry – is in the midst of a dramatic period of change.
First of all – and the primary focus of our weekly Market Recaps – the prices of existing issues are dropping.
We noted as much last week, and the phenomenon continued this week.
The median price of the now 38 different public BDC issues we track dropped to $25.21, from $25.29 and $25.35 two weeks before.
Across The Board
Furthermore, the other metrics we look at to get as full a picture as possible also suggest weakness.
For example, for a second week in a row no individual issue traded at $26.00 or higher.
On the other hand, 8 issues traded below par.
(Interestingly, the lowest yielding issue was Hercules Capital’s (HTGC) most recent Baby Bond issue with the tickerHCXY.
HCXY pays 6.25% and has an unusual 15 year maturity , but does not have an S&P investment grade rating anymore.
The effective yield is 6.5%).
We believe one of the culprits for lower BDC Fixed Income prices might be the rise in the risk-free rate.
For illustrative purposes we look at the 10 Year Treasury as a useful shorthand for what’s happening in the broader bond markets.
As everyone knows by now, long term rates are on the rise.
However, this week the 10 Year rate stabilized but remained over the magical 3.0% level, closing at 3.06%.
Also Going On
On the other hand, this was a quarter end, with many issues paying out their interest due.
That can shave down prices in the short run but give investors the wrong read.
Nonetheless, when we looked at our Market Recap from a year ago – when similar quarter end conditions applied – there is a definite change.
Then there were 4 issues trading at $26.00 or above and only 3 below $25.00.
The median price was $25.38, or 0.7% higher than this week.
With the run-up in rates supposedly not done (but who’s really to say ?), further price pressure on the BDC Fixed Income sector is possible.
We may even be headed towards a psychologically important – to the BDC Reporter at least – of a median price of $25.00.
That’s only a (0.8%) further drop away.
Ironically, this downward pressure on prices (admittedly modest in the bigger scheme of things) is happening just as the BDC Fixed Income universe is expanding.
Late this week, two new issues which we’ve discussed in the Recap and in individual articles, began trading.
One is the afore-mentioned HCXY, and the second New Mountain Finance’s (NMFC) first Baby Bond with the ticker NMFX.
The latter is notable as NMFC’s freshman issue brings to 26 the number of BDCs that have at least one public bond issue out there.
(Alcentra Capital – ABDC- has issued InterNotes but due to their low liquidity do not get counted by the BDC Reporter).
The number of individual issues at 38.
However, that’s already changing.
As we were closing down for the weekend, we were alerted that Great Elm Corporation ( GECC) was preparing to issue a third (!) Baby Bond.
A draft Prospectus is available at the BDC’s website.
Nor is that all.
This week Prospect Capital (PSEC) returned to the debt markets – albeit placed with institutions – with another major debt offering.
As discussed in an article on September 28, 2018 PSEC is raising $100mn with 5 1/4 year unsecured notes.
Just Getting Going
Nor do we expect that BDC issuers are done, either with the public or private debt markets.
Looking down the list of 45 public BDCs we track, we can count at least a dozen likely issuers in the next 6 months.
Some of those will be refinancing existing issues, but many might be raising new debt.
What was a relatively stable, little changing corner of the fixed income markets is going through a major change, just as the broader debt markets are beginning to shift.
This will make for interesting reading – and debt investing – in the months ahead.