Not as bad as you might have expected
What to do with BDC stocks and bonds in this historic market sell-off ? Don’t ask us. Every investor will need to have a different response. We can tell you, though, that we’re locked in our office, regularly scanning prices and (reluctantly) listening to CNBC for that occasional Breaking News (“10 year Treasuries below 1.) !! 10 Year Treasury below 0.9% !!” etc).
We can report to anyone interested is something that will come as a surprise to some of you : BDC common stocks have been holding up pretty well under the market pummeling. Heck, BDC investors are doing better than the major indices, especially today (March 5). We’re not even in Correction Mode any more. We were on February 28, when BIZD (the ETF of the BDC sector) was down -12.4% from a recent high spot before Covid-19 became a household word back on February 20. Since then, though, value buyers have jumped into perceived bargains and cut the loss to (7.6%). Even today intra-day, BIZD is off less than (1%) as we write this, less than a third of how much the major indices are.
We track all 45 public BDCs against their 52 week highs and lows. There have been a lot of the latter of late, including two more today (OXSQ and HCAP). Still, at the end of last week there were 34 BDCs trading within spitting distance of their lows. Today there are only 10. Opportunity is knocking in the minds of many investors, which is keeping the sector as a whole - as opposed to some individual stocks - from falling too far.
Is this good or bad for existing BDC stock holders and for those with money in hand looking for bargains ? That’s where things get tricky. Historically, the BDC sector has rarely dissociated itself from the major indices for long. Where the S&P 500, the Dow and the NASDAQ goes, BIZD has followed. That’s especially true when the markets are going down. That might presage BIZD dropping faster than the other indices at some point, assuming they continue lower.
History also shows that credit investors - which includes BDC shareholders - tend to freak out during periods of sustained (i.e. more than a few days) uncertainty and sell,sell, sell. The theory is that the first casualties of any weaker economy will be the highly leveraged borrowers that BDCs lend and invest in. Every recession has resulted in a tripling or quadrupling of bad debts and lower recovery rates than during expansions. The first investors out - the theory goes - will avoid years of credit losses, lower dividends and much drama. That hasn’t happened yet. To our way of thinking, investors in the BDC sector - and in credit generally if you follow as we do what’s happening in the other segments of non investment grade debt - remain very optimistic.
That’s not so good for bargain basement hunters, but reassuring for anyone who still holds BDC stocks or who has bought back in recently.
We believe - and now we’re getting outside the arena of what expertise we have - that things are more likely to get much, much worse than get better any time soon. If we’re right - and we hope we’re not - this might be a good time to lighten one’s exposure in BDC common stocks. If we’re wrong, expect to see BDC prices bounce back to pre-Covid-19 levels very quickly.