- Week Two of BDC Earnings Season was a wild one, with much volatility, a fair number of surprises and much more.
- The UBS Exchange Traded Note with the ticker BDCS – which we sometimes use as our measuring stick – was up.
- Then down, then up.
- BDCS ended up at $20.83, from $20.70, or 0.6%.
- That’s now 2.8% above the lowest price of the year.
- With more and more BDCs reporting investors were able to make informed decisions – more or less – and that caused big price changes both upwards and downwards.
- 8 BDCs went up in price more than 3% on the week, and 8 dropped in price more than 3%.
- The Week’s Winners were (using tickers only) : MFIN, TICC, PSEC, FSIC, TCRD, GAIN, NEWT & OHAI.
We’re Outta Here
- Ironically, MFIN was the Number One Gainer (up 32%) in the week they announced their intention NOT to continue as a BDC.
We’re Sticking Around
- More tellingly, the former King Of Taxi Medallion Lending and now aggressive consumer lender, appears to have started to convince investors they’re going to stick around- in some form.
Out And In
- TICC Capital (TICC) – despite reporting barely OK results – was up 12.7% on the week.
- However, that was more of investors rushing back in after rushing out a few days before.
- Over a 4 week span TICC is down more than (10%). Only traders are cheering this week’s results.
- As we know only too well, you win some, you lose some betting on these short term price changes.
Misreading The Tea Leaves
- PSEC, too, had a relief rally after earnings came out, up 5.5% on the week as things did not seem as dire as some feared.
- Over 4 weeks, though, PSEC is still down (4.9%), and was at a record low just a few days ago.
What A Difference A Week Makes
- Just look at the list of the Week’s Price Winners again: 7 of the 8 have had the word “trouble ” attached to their names in recent weeks.
- This is Mr Market ducking, weaving and speculating.
- For a few weeks, the stronger BDC players were moving up in advance of earnings.
- Now it’s the turn of the weaker BDC players.
- Still, of the 7 troubled BDCs on the winners podium, 5 saw their price drop over a 4 week time frame.
- Of all 8, 5 are down in price over a 52 week period.
- There was plenty of activity among the week’s notable price losers.
- The major casualty was Bank Of New York sponsored ABDC, down (16.9%) on results that satisfied no one.
- The other 7 3% plus price droppers were a mix of recent over-performers (SCM, HCAP, OFS, WHF) and under-performers (GECC, CPTA, BKCC).
In All Directions
- As we almost emerge from quarterly earning reporting, an almost equal number of BDCs (20 up, 26 down) are trading either above or below their 50 Day Moving Average.
- There’s still plenty of pain in the sector, with 12 names trading within 5% of their 52 Week Lows.
- On the other hand, there are still 10 BDCs within 5% of their 52 Week High, and 18 within 10%.
Be Careful Who You Choose For Your Dance Card
- Taking a step back, we could say that in the last 52 weeks the BDC Sector has become a “stock pickers market”.
- 12 BDCs are up by 10% or more over this longer period and an almost equal number are down by 10% or more.
- The top 3 performers (GAIN, MVC, CSWC) are up 38%,25% and 22% in a year. (We’ll let you add-on the dividends).
- The worst 3 performers (OHAI, TCAP and ABDC) are down (57%,48% and 40%).
Crystal Ball Time
- With most of the BDCs having reported – and mostly the September fiscal year end funds to hear from- the market may settle down in the week beginning November 13.
- However, investors may also continue to re-assess who they like and don’t like a while longer as relative values shift across the BDC universe and the analysts fiddle with their models.
- We will only add – a little ominously – that despite all the earnings reports and all the heavy breathing surrounding this BDC or that, nobody has diverged materially from the long term path we envisage for each of them.
- From a fundamental performance basis – though not from a short term price standpoint – nothing much has changed.
- We’ll be looking at many of the individual BDCs in the weeks ahead and illustrate our point.
- The BDC Reporter is still digging through the 10-Qs and each BDC’s investment portfolio.
- From a price standpoint, this was another quiet week where BDC Fixed Income was concerned.
- The median price of the 34 issues we track was up by a meaningless 1 cent to $25.40.
- Like most weeks, the number of fixed income issues at or above $26.00 was 3.
- As per the usual, only one issue was priced below par.
- [Notwithstanding the jump in MFIN’s stock price, its Baby Bond remained under $25.00. We’ll be interested to see if that changes soon].
- Whereas under-performing BDC common stocks were punished with drops of 20%-50% by under-performance, there was hardly a ripple where their debt values were concerned.
- As has been the case for nearly two years now, the price for most every BDC fixed income issue (except for MFINL) has mostly been affected by its coupon and the likelihood of its early redemption, rather than fundamental questions of long term credit quality.
Going, Going, Gone.
- Months after collecting $100mn from selling a subsidiary company, MVC Capital (MVC) finally got round to deciding what to do with its expensive Baby Bond nominally due in 2023.
- MVCB will be redeemed with the proceeds from a new Baby Bond issue – interestingly due in 2022- and priced at 6.25%.
- That’s a 0.875% savings on nearly $120mn
- Judging by what’s happened on other fixed income issues refinancings, at least one year of interest expense savings will be eaten up by the accounting cost of accelerating amortizing costs of issuing the 2023 Baby Bond; the legal and other out of pocket expenses associated with the new issue and the likelihood that both issues will be outstanding for a few weeks.
- Worth noting is that the 5 year Baby Bond has become the unsecured debt period of choice, and the sweet spot where investor requirements and BDC issuer needs meet up.
- We’ll see if that continues because we expect – at least – two more Baby Bond issues in 2017, and both by newbies.
Coming Soon To A BDC Near You
- On its IIIQ 2017 Conference Call, Capital Southwest (CSWC) all but promised to issue a publicly traded Baby Bond.
- That’s partly because the even cheaper source of long term capital – SBIC debentures- do not look like they’re getting doled out any time soon.
- [We have the sense that the SBA – which was handing out new licenses and debentures like candy awhile back – has slowed down across the board. That’s causing the public and private markets for medium term debt to get more attention].
- OFS Capital (OFS) – also stymied by the SBA on a much needed new license- is also making all the right noises about coming to the public debt markets.
- If those two issuers come to the BDC public fixed income market, the number of issues outstanding could jump to 36 and the number of issuers to 27.
- If we count BDCs that have raised debt capital in the institutional market only (like TCP Capital and BlackRock Capital ), the number of BDCs which have raised unsecured debt accounts for about two-thirds of the total.
Watch That Table
- We expect plenty more capital markets activity by numerous BDC players in the months ahead.
- The BDC Reporter continues to update its World Famous Fixed Income Table whenever something new occurs. [You can subscribe to the BDC Reporter for just $50 a month. Plus there's a Two Week Free Trial].
- We expect to be spending much time fiddling with the Fixed Income Table in the weeks ahead.
Race To The Bottom
- Investors, though, will have to contend with ever lower yields.
- No more 9.00% coupons (MFINL) or the recently retired FULLL at 8.25%.
- Many more 6% and lower yields.
- When do investors say “no mas” ?
- We suspect there’s a way to go, but with every new lower coupon refinancing, this segment of the fixed income market loses a little shine.