Wednesday, June 19, 2013: As we write this, the markets are waiting for the latest Fed pronouncements. The BDC sector (as measured by the movement of the UBS Exchange Traded Note with the ticker BDCS) is down -3.7% from the May 21 high, when all the credit markets became spooked about the prospect of higher interest rates. It's been a difficult three weeks as a number of BDC common stocks have been hit by the shift in sentiment. We'll give one example: industry leader Ares Capital (NASDAQ:ARCC) dropped from $18.27 at it's high on May 21st (!) to a low of $16.47 on June 12th. That's a 10% drop in 3 weeks !
With that backdrop, we are encouraged to see that the BDC sector continues to be able to raise long term capital in these uncertain market conditions. Historically, poor market conditions have tended to put capital raising activity on hold. However, that's not the case right now if these 3 new deals are anything to go by:
New Mountain Finance (NYSE:NMFC) managed to both sell 2mn new shares for growth, and sell 4mn shares for existing shareholders wanting a payday (usually a very bearish signal for remaining shareholders). The price on the new shares was 9% off the 52 week high, but still above Net Asset Value by a smidgen.
Yesterday THL Credit (NASDAQ:TCRD) announced a 6.6mn share issuance, which was priced a few hours ago at $14.62. Existing shareholders may be surprised, or even miffed, by the unexpected capital raise because TCRD is under-leveraged, and does not appear to need any new capital in the short run. Of course, there could be an acquisition or a growing backlog of business motivating the raise, but we'd guess it's just a matter of taking it when you can get it. BDC investing is a long term business so that kind of thinking makes sense to us.
Like NMFC, the equity raise is at a 9% discount to the 52 week high, but materially above TCRD's latest Net Asset Value. Expect another pause in TCRD's policy of gradually increasing the dividend as the new capital gets absorbed.
Today tiny asset based lender Full Circle Financial (FULL) announced the issue of 7 year publicly traded Notes (also called "baby bonds" by some). Details are still sparse, but it's remarkable that such a small BDC can raise unsecured capital in the markets when just a few months ago there was some uncertainty about the renewal of FULL's bank revolver (now resolved with a new lender).
CONCLUSION: It seems clear confidence in the BDC sector continues unabated in the institutional market, notwithstanding the recent market pull-back. Will this be the swan song before concerns about tapering etc causes the capital spigot to close off ? We don't know. Back to Fed watching everyone.