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BDC Market Weekly Review: Buy Rumor, Sell News Action In ARCC Earnings

Apr. 02, 2022 6:26 AM ETARCC, FDUS, GBDC, OCSL, TRIN33 Comments


  • We take a look at the action in BDCs through the fourth week of March and highlight some of the key themes we are watching.
  • BDCs had a great week with a 2% return, making March the strongest month year-to-date.
  • We take a look at the odd behavior of ARCC in the lead up and post its recent quarterly earnings announcements.
  • Our BDC holdings continue to perform well - with 4 of our 6 holdings in the top 8 performers year-to-date.
  • Given the willingness of the Fed to overtighten to bring inflation under control, a protracted recession remains a key risk - we view more resilient BDCs as attractive in this scenario.
  • I do much more than just articles at Systematic Income: Members get access to model portfolios, regular updates, a chat room, and more. Learn More »

Digitally enhanced shot of a graph showing the ups and downs shares on the stock market

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This article was first released to Systematic Income subscribers and free trials on Mar. 25

Welcome to another installment of our BDC Market Weekly Review where we discuss market activity in the Business Development Company

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This article was written by

ADS Analytics profile picture

ADS Analytics is a team of analysts with experience in research and trading departments at several industry-leading global investment banks. They focus on generating income ideas from a range of security types including: CEFs, ETFs and mutual funds, BDCs as well as individual preferred stocks and baby bonds.

ADS Analytics runs the investing group Learn more.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of FDUS, OCSL, GBDC either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (33)

It is nice to see an author mention TRIN. I own TRIN and FDUS as well as PNNT and HTGC, so a good week. I used the drop in ARCC to add more but I couldn't see a good reason for it. Thanks for providing insight into that dip for ARCC. As always, a great, insightful article.
RoseNose profile picture
Thank you for the interesting take on the recent ARCC price changes. Glad to know it truly is still performing well. Its my largest BDC holding. I have 8 others to enjoy.... HY gives a nice $ kick to the Rose's Income Garden portfolio.
KMR holder profile picture
@ADS Analytics You state..."we think it makes sense for investors to hold some allocations to BDCs that are likely to remain more resilient through a downturn such as GBDC as well as OCSL, both attractive at sub-100% valuations or below $15.40 and $7.40 respectively.".
These are two BDCs with low equity exposure which lend to higher quality borrowers, so that makes some sense. My question to you is more general. If they are attractive below NAV, how attractive are they above NAV. I assume you mean attractive to buy and or hold below NAV as downside risk is less for them if the economy turns. I expect that they will be relatively safer than equity heavy BDCs even above NAV, but at what point would risk outweigh their value in the portfolio?
At what premium are they no longer worth holding?
OCSL has grown to close to 45% of my direct individual stock holdings, not to be confused with my total equity exposure though funds and indexes . Yesterday as its share price exceeded December's NAV, I trimmed the position slightly at $7.47. I plan to trim further at $7.60, and more near $8.00. I plan to add below the most recently announced NAV.
ADS Analytics profile picture
@KMR holder Yep very good question. You can think of it in relative terms to the overall sector i.e. so long as something remains cheap to the sector it's attractive. The risk here is that if the overall sector is expensive then something that's cheap to the sector can still be expensive in absolute terms.

Or you can think of it in absolute terms which is a more difficult question. Here, you'd want to think of at least 2 things : 1) the potential NII uplift from higher Libor over the next 2 years and 2) the potential impact of a recession if we have one over the same time frame on default rates. This way to think about it is more speculative but more important for longer-term returns. The answer here will also be different for different investors - those who are "through-the-cycle" investors and those who are more tactical will respond differently to the same data.

KMR holder profile picture
@ADS Analytics When I buy a stock, I look for high teens annual returns with little downside risk. Since my initial OCSL purchase in May 2018, it has exceeded my expectations, returning a 22.52% CAGR. I have been able to do much better trading around a growing core position.

Today I don't see a BDC which can be reliably expected to perform to that level going forward, so I have been in capital preservation mode with my BDC positions, which is almost entirely OCSL. I just exited a small FDUS position as it rose rapidly above NAV. Two weeks ago I reentered ARCC in a small way and plan to exit at a 15% premium. My gain in ARCC has been more than 8%.

I retain my large OCSL position today in part because I would classify it as a true bond substitute for my portfolio when it trades around NAV. When one looks at it dispassionately all it really is is a levered portfolio of floating rate debt managed by one of the world's most risk averse and skilled debt managers. At NAV or below I don't really consider it to be a stock.

I believe that holding a BDC such as OCSL or GBDC at or close to NAV should reliably provide investors an income stream close to their yield on NAV with little long term capital risk. If I were to treat them as stocks, I would demand much more, I don't believe one can expect that without them trading at significant discounts.
@KMR holder Thanks for your comment. How do you track NAV so closely?
I do not try to guess moves in ARCC stock. It has and will continue to be a long term holding for me. I consider this “BEST OF BREED” of BDCs to be the long term buy and hold of my portfolio. Good investing all.
Income4ever aka Cyclenut profile picture
Agree, Long MAIN as well, HRZN and looking to scoop up HTGC -$16.75
@Income4ever aka Cyclenut: I agree. My second largest holding is MAIN!
@Javelina Looking at the daily price of many stocks, one sees occasional evidence of a random walk. The balance of supply and demand for shares on a daily basis tends to be the reason. Often investors want to wait to purchase shares until they see a price decline. Similarly investors seeking to sell (but under no immediate pressure to sell) will often wait until the price goes up. Assuming a reasonable supply of stock for sale and a reasonable demand, the price of many stocks yo-yo. Check out XOM.

It follows that seeing these price swings, some investors engage in day trading. Some even make a profit utilizing that technique.

I've discovered that I'm no good at day trading. So, I buy for the long haul and for dividend income.
Will104 profile picture
Got out of HRZN and have had a great run with TRIN

Tempted to take profits in TRIN - but probably will re-load ARKK puts as a hedge
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