October 20, 2011: Bored ? Nothing to do ? Can’t wait for the flood of BDC earnings reports for the third quarter and the chance to pore through the 10-Qs ? Now you don’t have to wait every three months for your data fix. For one company at least you can swim through an ocean of portfolio information every month. We are talking about TICC Capital (ticker: TICC). This mid sized BDC has been posting to its website on a monthly basis a Monthly CLO Trustee Report. There are two reports on file. Here you have 130 pages of data about all the loans in the Company’s recently launched Collateralized Loan Obligation. This CLO is the only form of debt financing TICC uses and contains most of the Company’s loan assets: $183mn to October 4, 2011. You’ll find listed every conceivable data point about every loan: the borrower, the type of loan, the interest rate, maturity, Moody or S&P rating (if available). There’s a recovery rate calculation as well which shows how much of a loan is projected to be recovered by the lender should the borrower default. Moreover, the report shows you how the CLO is doing against its covenants. Page 3 have the summarized key asset and interest coverage ratios for the portfolio, but below you can see the detail of every covenant calculation.
A NEW LEVEL OF TRANSPARENCY
We’ll switch from being facetious to point out that this is about as transparent a BDC can be. The information is updated regularly (monthly), all supporting detail is provided, and everything is almost in real time. This is like being allowed to tour the sausage factory any time you want and witness how sausage is made. Any regular visitor to the TICC site will be able to watch the progress of the CLO and catch any deterioration or improvement in credit quality and be able to evaluate if a default is likely to occur. However, beware watch you wish for where transparency is concerned because the amount of data is huge. Plus, there’s no User’s Manual so you might be left guessing what the information means at time. Also, there’s no commentary from TICC so you’ll have to do your homework and draw your own conclusions. This is red meat for investment bankers and analysts with the time to sift through all this data. The rest of us will have to rely on careful data skimming.
WHAT WE THINK WE LEARNED FROM THE CLO REPORT
The CLO is very new and loans still being added to the portfolio. However, the bulk of the loans are on the books. It’s a very diverse group, as required by CLO rules (although still close to the covenant requirement). As you’d expect from a CLO launched in the past 2 years (when structures have remained very conservative), the vast preponderance of the loans are in the senior debt category.We were surprised by how companies have a rating (single B mostly), and average nominal maturity 4.7 years (real life probably 2-3 years).
The good news was that the portfolio appears to be paying a very healthy gross yield. Of course borrowing costs are very low, so the net spread is twice the minimum required. The broad net spread is good for TICC shareholders, as is the fact that no loans appear to be in the default and the Company still has dry powder to pick up new investments at good prices in today’s environment. The bad news is that there are a seemingly endless number of covenants for the CLO to pass to ensure all the monies flow to TICC, and a few of the covenants (to the degree we are reading this right) are very tight. Look at recovery rates required versus actual.
KUDOS
Nonetheless, we offer our kudos to TICC Capital for raising the bar on disclosure even if it means we’ll have even less free time.
P.S. By the way, when we re-visit the TICC CLO Report in the future we’ll be sending out a message to our Twitter subscribers on our findings. It’ll be brief: something like “portfolio metrics improving but one covenant close to default”. Just click here to subscribe.
