BDC Market Snapshot: Week Ended January 28, 2022

MARKET CONDITIONS

As we've recently written in the BDC Reporter, the BDC sector has been battered around since January 12,2022  but is emerging from a difficult first month of the year in pretty good shape. The Wilshire BDC Index is up for the month - albeit very modestly - in price and total return terms and 19 individual BDCs managed to book a price gain in January to date. The sector is now only (3.4%) behind its 52 week high and a third of players are trading at or over book just as IVQ 2021 earnings season is about to begin.

That's (pretty) good news in a relative way for BDC investors long the sector, but not so great for anyone looking for outstanding opportunities in the current stormy conditions which have the NASDAQ in correction mode; the Russell 2000 in bear territory and the S&P 500 down (7.0%) from its high. Unfortunately, the markets appear to be aware that all LIBOR-tied lenders should benefit in the quarters and years ahead from higher short term rates (4 to 5 hikes are taken as likely in 2022 alone)  and are not joining the general run for the exits of recent days.

We've reviewed our 5 year projections for the 45 BDCs we track, as we do at the end of every week but are beginning to write about for the first time with this article. It's a good news/bad news story. Let's start with the good: We can identify 6 BDCs that we project with generate a total return of 75% or more over 5 years, i.e. higher than 15.0% per annum. The bad news: Many of the BDCs involved are turnaround stories and require a contrarian perspective on the outlook for the future.

For example, there's Apollo Investment (AINV) and FS KKR Capital (FSK) - both of whom have cut their distributions multiple times in the last 5 years and are expected by most pundits to be on the verge of doing so again in 2022. We're estimating otherwise and believe there's a better than average chance distributions will be maintained at the current level, even without factoring in higher short term rates down the road. What's more, given that skeptical market consensus (FSK trades at only 8.2x this fiscal year's EPS and AINV at 9.3x), the two BDCs could cut their distributions as most expect, and still generate a decent return any way (10-12% per annum).

Also speculative, but in a different way, is Newtek Business Services (NEWT). The BDC will soon transition to be a bank and our long term projection is something of a wing and a prayer because there are so many unknowns ahead. NEWT will be cutting its distribution once bank status is achieved, but how much ? New deposits and debt will be raised with the aid of a bank license to take deposits but when and at what rate ? Then there's the uncertainty about what multiple the company will attract. As a BDC that multiple was already high but management, Board and the advisers all seem to believe that will be higher once bank/fintech status will be achieved. Who are we to say otherwise ? NEWT is speculative, but the business has abundantly proven its ability to earn very high income and increase its assets under management over a very long period. We also note that several very well known financial firms have been  working with NEWT of late - a reassuring phenomenon.

Less speculative are picks Crescent Capital (CCAP) and TriplePoint Venture Growth (TPVG). The former raised new equity capital last November for $21.33 a share but trades at only $17.83 - (16%) lower. That discounted price and a projected $1.79 in distributions, going to $1.80 over time accounts for the potential outsized 16.3% annual return we're projecting over the next 5 years. In its short history as a public company CCAP - now owned by an insurance giant has never cut its distribution.

Also boasting a solid history of unchanged quarterly distributions is TriplePoint Venture Growth (TPVG), which has been doing so since 2014. After shooting up in price through mid-November 2021 - reaching all time highs - the BDC has dropped (17%). As with CCAP, this makes for a buying opportunity if we're right that TPVG's dividend - $1.49 in 2021 - should grow modestly through 2026. For what it's worth, the analyst consensus is for earnings to grow by 20% (!) in 2022 over 2021.

However, the top potential gainer in the next 5 years this week is Cion Investment Corporation (CION). That's our Best Idea, which we'll cover in a stand-alone article. As of Friday CION closed at $12.20, (19%) below its 52 week high of $15.09 and a (26%) discount to net book value per share. The yield on its regular quarterly dividend is 9.2% and on its projected total 2022 pay-out is 10.7%. Management has already committed to offering up special distributions twice a year.

SHORT TERM OPPORTUNITIES

We're not much for the short term hopping into and out of BDC stocks to catch a briefly rising price. For every time we've been right there's been one (or more) when we've been wrong, all of which can cause unnecessary angst even if the positions work out over time. Nonetheless, we can't help noticing that many BDC high flyers in price terms came off the boil as early as November 2021 all the way through January 28, 2022. Much of this has probably to do with profit taking because there were plenty of investors out there sitting on big unrealized gain dating back as early as April 2020. The appeal of taking the money and running is undeniable especially when the markets begin to back up.

We count 9 high quality names - all of whom which are expected to maintain or increase earnings/dividend in 2022 - that are off (10%) or more off their 52 week high, and substantially below their 1 month high. (We're leaving out CCAP and CION). We will create a mini-portfolio of the top 5 names on Monday composed of the BDCs the furthest off their 1 month high, and susceptible to moving back up. On paper, the average return comes to 13.8%, and much higher if the 52 week high is achieved. The BDCs involved by ticker are: CSWC,HRZN,TPVG,BXSL and SAR.

We'll check back weekly and see how those short term price appreciation opportunities have worked out...

BDC PUBLICLY TRADED UNSECURED DEBT

The BDC Reporter has stopped writing regular recaps of what's happening to BDC fixed income debt prices because the number of publicly traded issues has dropped so much. There are only 19 issues left, 3 of whom were partly redeemed recently. We estimate that 6 of the 19 issues will get repaid in 2022.

BDC debt prices remain high given the low returns available. All the issues trade over par and the median price is $25.31. The average yield at market price is about 5.5%, and that's even less when you consider the premium being paid. Or, in other words, there are no good ideas in this segment right now, but that might change with interest rates in the future.