BDC Reporter News and Views on the Business Development Company Industry Mon, 29 Aug 2016 01:39:22 +0000 en-US hourly 1 Atlas Resource Partners: To Emerge From Bankruptcy, Change Name. Mon, 29 Aug 2016 01:31:21 +0000
  • August 28, 2016: On August 26, 2016 Atlas Resource Partners, L.P.  announced that it had received court approval of its prepackaged restructuring.
  • The Company is expected to emerge as Titan Energy, LLC on September 1, 2016.
  • Source: Atlas Resource Partners | Press Releases
  • As previously reported the Company’s restructuring will include both a debt for equity swap and new debt issuance.
  • This is a major restructuring as pre-Chapter Atlas Resource Partners had assets in excess of $1bn and liabilities above $1.5bn.
  • See prior BDC Credit Reporter Alert: August 20, 2016 for investment ownership details. 3 BDCs with Major Exposure in aggregate.
  • BDC Credit Reporter says: “Impact on the 3 non-traded FS Investment funds which hold second lien debt in the Company unclear.”
  • Goes on  to say: “With Second Lien lenders [where BDC exposure is concentrated] receiving only 10% of the equity in “Titan Energy” and with $700mn in debt still outstanding post-BK, we’re surprised to see BDC debt written down only by 20% as of June 2016″.
  • Final word: “Expect Realized Losses to be booked in IIIQ 2016, and material decrease in income from debt to equity swap and much lower debt outstanding and (probably) a lower rate, from 10% prior to BK”.
  • FS Energy & Power, FSIC II, FSIC III
  • Drilling
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    Magnetation LLC: Company To Close Sat, 27 Aug 2016 13:44:11 +0000
  • August 27, 2016: Iron-ore concentrate maker Magnetation LLC is on the verge of closing down, according to a company statement.
  • The shutdown would involve its Minnesota iron ore concentrate plant, rail loading facility and Pellet Plant located in Reynolds Indiana.
  • According to the announcement the closure would occur after September 30 and the Company would liquidate.
  • Left open: the possibility of a last minute acquirer or financing.
  • Company is 50.1% by Magnetation Inc. and 49.9% by AK Steel, both of which have fully impaired their investments.
  • The Company is currently operating under Chapter 11 bankruptcy but may switch to Chapter 7  or liquidation.
  • Source: Company Press Release.
  • BDC Exposure: Modest ($10mn-$50mn): $12.4mn. However, until recently AINV exposure was $46mn at Cost (see Investment Ownership).
  • Only BDC involved is Apollo Investment (AINV), whose first lien loan is already on non-accrual and fully written down.
  • Screen Shot 2016-08-27 at 6.28.09 AM
  • The BDC Credit Reporter says: “Expect no write-up and a full Realized Loss in the IIIQ or IVQ 2016″.
  • Adds:” The complete write-off of a secured, first lien loan underscores that the terminology is not predictive of loan recovery status.”
  • Notes: “The expected Realized Loss-albeit anticipated- on the full $46mn exposure by AINV  is a major set-back equal to 1.5% of equity capital at par”.
  • AINV
  • Shop closing down sign
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    FS Investment: Publishes Company Presentation Fri, 26 Aug 2016 15:57:10 +0000 August 26, 2016: BDC giant FS Investment (FSIC) issued a  37 page  Company Presentation . Rather than just pass the link on to readers we thought we’d review some of the key points made and add comments from a BDC Credit Reporter and BDC Activist perspective:

    FS Investments Logo

    Highlights: Page 16: Infographic showing FS Investment Group asset size versus other major BDCs.

    Message: FS Investment Group biggest BDC organization with $16 billion under management over 5 publicly traded and non publicly traded funds.

    BDC Reporter adds: “True, but presentation omits assets held by several other BDCs in off balance sheet structures. By our count, Ares Capital remains larger in assets under management size”. That’s if size matters in BDC Sector, which is debatable”.

    Page 17: 84% of FSIC loans part of $100mn loan commitment to borrowers.

    Message: Less competition from other BDCs: Only 5-10 (depending on deal size) can hold $100mn+ investment.

    BDC Credit Reporter says: “May be true but there is competition from many non-BDC sources including banks, CLO market, High Yield Bonds, etc.”

    Also : “Big bet-literally and figuratively-on top end of leveraged loan market with average debt to EBITDA multiple 5.4x (page 20).

    Page 22: Diversified by borrower and industry. Reports 108 borrowers and ten main sectors (with Other at 10%).

    BDC Credit Reporter comments: ” FSIC is way too concentrated by borrower and sector. Chart shows top ten borrowers account for 40% of investment assets, or roughly 70% of shareholder capital. On an equal weighting basis the top ten would only represent less than a tenth of the portfolio.

    Adds: “Sector concentration is the same: 4 sectors account for over 50% of all assets, including Energy still with 12% (and about 20% of shareholder equity).

    Ends: ” In our view, a much more granular portfolio would be preferable, but is difficult to achieve due to FSIC’s strategy of “Bigger is Better” which requires clubbing together with other FS Investment funds to underwrite very large transactions. We have made the same observation about Ares Capital’s portfolio (especially in the winding down Senior Secured Loan Program). Just a couple of missteps by the bigger names and the BDC could lose 4x more than if a more even weighted portfolio approach had been adopted.”

    Page 24: Liabilities are fixed but many loan assets are floating.

    Message:  A rise in short term rates will boost earnings. Presentation says  a 300% basis points increase would improve Net Investment Income by 21%.

    Black Swan

    BDC Credit Reporter says: ” Markets have been waiting for the normalization of interest rates, and a 300-450 basis point increase for nearly a decade. We are not investing with the expectation of such a major increase in any foreseeable future. Ironically, “rate normalization” would be a “Black Swan” occurrence.

    Adds: “Investors in BDCs should be less concerned with the potential increase in Net Investment Income as to what will be the impact on highly leveraged borrowers if their cost of borrowing increases by 300bps, or 30%. A low single digit increase in the default rate would wipe out any benefit from higher income.”

    Page 27: “Manager/ shareholder alignment”. Points to 3 year total return high water mark on incentive fee income, management fee of 1.75%, high water mark capital gain fee looks back to inception, $15mn in share purchases by parent and officers since 2015.

    shoulder to shoulder figures

    BDC Activist says: “Much of this in the eye of the beholder but management fee still high to BDC Activist. Ares Capital charges 1.5%. Moreover, FS Investment provides no discount on fee although many loans (see above) booked in association with sister funds.

    Adds: “Capital gain fee treatment not very important because virtually all assets are in the form of debt where capital appreciation does not occur.”

    Plus: ” Thumbs up for having a high water mark concept but calculation is opaque (no disclosure on how calculated quarter by quarter) and allows payment of incentive compensation to Manager even as BDC incurs material losses.

    At June 30, 2016, FSIC had incurred over $180mn in Realized and Unrealized Losses on total equity capital at par of $2.3bn (or 8% of shareholder’s capital) but was still paying the Manager Incentive Fees of $14mn in the quarter. That was equal to 25% of Net Investment Income attributable to shareholders.

    BDC Activist would say that FSIC should not be paying any Incentive Fees until Net Asset Value exceeded the 2014 public issuance price of $10.0. As of June 2016, the NAV was $9.18, but would be closer to $8.60 if all the earnings achieved in earned in earlier periods had been distributed to shareholders and not doled out over time, as per the Manager’s dividend policy.”

    As to the Group and managers purchase of FSIC stock, the amounts involved pale by comparison with the hundreds of millions in fees charged to the BDC by the Manager since going public.  We doubt the amounts involved align Manager interests with those of shareholders given the vastly different economics involved.”

    Page 30: “Strong Credit Performance”. Claims 1.1% annual default rate on portfolio loans and 108% recovery rate. Data on performing and under-performing companies.


    BDC Credit Reporter says:” On paper, very good metrics. Average leveraged debt default rates over the long term have been quoted at 3.3%. Still,  hard to reconcile with Realized and Unrealized Losses recorded on balance sheet. In any case, the BDC has not yet been tested from a credit standpoint by a recession. Too early to claim business model can generate superior credit results. Jury still out.

    Moreover, internal credit rating chart shows very few portfolio companies on which FSIC expects a loss (6 of 108). BDC Credit Reporter-always looking at the glass half empty-notes that 29 portfolio companies of the 108 in portfolio are rated under-performing to various degrees, which seems high with so many new loans on the books and in an economic expansion.

    Full Disclosure

    DISCLOSURE: Please note Southland Capital Management-the parent of the BDC Reporter-is short FSIC’s stock (albeit with no success) principally due to concerns about the under-performing loans in portfolio.

    Smile Brands Group: Company Sold Fri, 26 Aug 2016 14:01:37 +0000
  • August 26, 2016: The dental chain support organization Smile Brands Group was sold earlier in August to Gryphon Investors for an unknown amount.
  • Source: Company Press Release.
  • The Company was owned for several years by Welsh, Carson, Anderson & Stowe.
  • Smile Brands had faltered in recent years, with its publicly rated debt dropping from a B1 rating to Caa3 (Moody’s).
  • Welsh Carson etc. had to inject $30mn of additional equity and seek bank waivers and amendments in the spring of 2016.
  • Rating agency concerns included very high leverage: debt to EBITDA in excess of 10x.
  • Unknown if Welsh Carson recouped all or any of its investment in the Company and/or there was any loss by the existing lenders.
  • Gryphon  previously owned the Company with Freeman Spogli and has other investments in the dental sector.
  • Founder and ex-CEO Steve Bilt is working with Gryphon and has retaken the helm after departing in 2013.
  • New capital structure of Company is unknown.
  • However, Triangle Capital announced a $24.5mn investment in the Company on August 25th 2016 , in the form of subordinated debt and equity.
  • BDC exposure to Smile Brands pre-acquisition was Major: approx $100mn at cost over 7 different lenders. See Advantage Data below:
  • Screen Shot 2016-08-26 at 6.32.38 AM
  • Biggest exposure from two FS Investment Group BDCs: FS Investment II and FS Investment (FSIC) with 60% of debt.
  • All BDC investments in the form of senior secured debt due 2019 and valued at discounts of 8%-12% at June 2016.
  • If repaid at par, BDC lenders should recognize about $10mn in Unrealized Appreciation in IIIQ 2016.
  • BDC Credit Reporter highlighted financial troubles at Smile Brands in May 12 review of Fifth Street Senior Floating (FSFR). See below:
  • SMILE BRANDS GROUP: This sponsor owned owner of a dental chain has been on our Watch List since the IIQ of 2015. Here the most recent valuation suggests an improvement in fortunes is underway. We have the loan ownership data from Advantage Data of all the BDCs out there. Of the 5 BDCS that have reported first quarter valuations of their  loans to Smile (out of  7) most have decreased their write-downs by 10% or more. FSFR holds its Senior Secured debt at “only” a 16% discount to par, just half of the discount at its worst point. This may be related to a $30mn capital infusion by the Company’s PE sponsor-Welsh, Carson, Anderson & Stowe-in October 2015.
  • Smile Brands dentists
  • Always the wet blanket, the BDC Credit Reporter remains concerned. This company is rated by Moody’s which has a Speculative Rating even on the senior secured debt. In fact, in April 2016 Moody’s brought the rating down a notch in their arcane rating system, citing concerns that the huge debt load on the borrower (10X Debt to EBITDA !) is “unsustainable” and tighter covenants by the senior lenders and their requirement that Smile Brands seeks alternative financing or asset sales might cause a default before long. That was only a month ago. A default and a loss here are not inconceivable as performance and regulatory risk (there’s a whole back story about this sector that we won’t bore you with) remain high. If it was not for the recent unexplained up-valuation of the asset, we would most likely have marked this in Category 4, but we’re being generous and leaving Smile in Category 3.” May 12, 2016
  • BDC Credit Reporter says: “There are a number of unanswered questions, most notably if all the existing debt was repaid at par or repaid at a discount or rolled into the new financing. We also don’t know how much capital Gryphon committed to the transaction and how its existing dental service organization One Smile will fit with Smile Brands.”
  • Adds:” Noted that neither Welsh Carson nor any of the existing lenders has made any announcement and Triangle Capital’s press release was short on details too.
  • Final word: “The BDC Credit Reporter will continue to keep Smile Brands-even under new ownership-on its Watch List until further information is available”.
  • FSIC II, FSIC, SAR, FSFR, WHF, NMFC , Cion Investment, TCAP
  • Question-Mark
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    News Wrap-Up: Thursday August 25, 2016 Fri, 26 Aug 2016 01:48:45 +0000 Thursday August 25, 2016: We shouldn’t start every Daily Wrap-Up saying things are slow, but they are. Today was no exception. Here are the few highlights:

    Stock Price UpThe Biggest Winner from a stock price perspective was OHA Investment (OHAI), up 3.8% to $2.71. Amusingly, OHAI was the Biggest Loser yesterday, down -3.3%. Only underscores what we’ve been saying: this has become a speculative stock near an all-time bottom price, as investors probe whether or not the BDC will survive, and in what form. Volume was not particularly high or low, with 30,000 shares changing hands. No other BDC stock moved up more than 3% (our threshold for these breathless updates), suggesting an otherwise tepid market.

    Red Arrow DownThe Biggest Loser (and only 3% plus downside mover) was TriplePoint Venture Growth-a technology oriented BDC lender-which was down a whopping 4.2% on the day. The apparent reason: an analyst downgrade. Compass Point rated the stock Neutral from Buy (still with a $12.25 “price target). That was enough to drop the price to $11.5 at the close, down $0.50 on 3x normal volume. Like many BDCs TPVG at $12.0 a share was close to its YTD high, so the rating might have more to do with profit taking than anything else. Nonetheless, we are impressed by the apparent influence of an analyst on shareholder behavior. TPVG is now trading at a modest discount to its $13.05 Net Asset Value and just under 10X recurring earnings.

    Thums UpCapitala Finance (CPTA) issued a press release announcing the disposition of 4 investments in recent weeks, totaling $57mn. That was notable for several reasons. First, the dollars involved are substantial for a BDC with $595mn of portfolio assets at total value. That’s roughly 10% of the portfolio flowing back into the coffers in a few weeks (all this happened in August when both borrowers and lenders are supposed to be at the beach). Also, CPTA booked $10mn in Realized Gains on two of the dispositions, which is worth highlighting. CPTA has a good track record of booking Realized Gains. With this latest spate of gains the Company’s balance sheet should boast a net Realized Gain over the BDC’s history at September 30th. Finally, the energy-heavy portfolio of CPTA-which has caused them much trouble and waiver of fees in recent months-was lightened by the repayment of its loan to Sparus Holdings, a natural gas services company. Getting your money back (including accrued PIK income as CPTA proudly mentioned) is no mean feat in this environment. Most importantly, the departure of Sparus apparently brings  energy exposure down to 3% of assets from 9% at 12-31-2015, and 5.4% in the spring of this year

    In the weird world of BDC investing, all the above is both Good News and Bad News. Yes, realizing gains and getting out scot-free from an energy loan is a positive, but losing a tenth or more of your investment income is a negative, as those monies have to be put to work to ensure income and dividends can be sustained. Mr Market didn’t cheer too much at the news, with volume marginally above  average and a modest stock price gain. Still, the stock is at a 1 year high, so much of the Good News may already be in the price. The Company, though, still trades at a discount to NAV.

    Prospect Capital LogoFinally, Prospect Capital (PSEC) announced monthly dividends unchanged from prior periods, and as expected, for the next 2 months. This stock too is at a 1 year high.




    Fifth Street Finance : Changes In Governance Thu, 25 Aug 2016 20:46:39 +0000
  • August 25, 2016: Motley Fool author Jordan Wathen has written an insightful article about corporate governance changes coming at Fifth Street Finance (FSC) thanks to ground breaking challenges by disgruntled investors. To a degree, FSC is close to agreeing to many of the “shareholder friendly” changes proposed. From the BDC Activist’s standpoint this is Big News, so we’ve quoted the article in full and added our own comments:
  • “Among high-yielding business development companies, Fifth Street Finance (NASDAQ:FSC) has a bad reputation — and deservedly so.The company allegedly employed accounting gimmicks to hide non-performing assets, inappropriately recognized income ahead of its external manager’s IPO, and, just as it appeared that an activist might force much-needed change at the company, the company moved to buy off an activist.Investors have been so displeased with the company that they took the issue to the courts, and that may ultimately result in a settlement. The company disclosed that a proposed settlement includes a number of shareholder-friendly concessions by Fifth Street’s external manager, some significant, some not. But the impact to Fifth Street Finance should be carefully measured.
  • One condition of the proposed settlement is that Fifth Street Finance will receive a $1 million fee waiver for 10 consecutive quarters starting in January 2018. Though good for shareholders at first glance, note that the fee waivers tally to $10 million of total future benefits, offset by $9.7 million of additional expenses incurred by Fifth Street Finance due to lawsuits and an investigation by the SEC in the last nine months. One can thus consider it future payback for expenses in the here and now.
  • BDC Activist adds:”Thanks to the iron clad protections for the incumbents available under Maryland law and the one sided contracts signed between BDCs and their external managers, the latter are absolved of almost all liability for their actions on behalf of the fund that they manage every detail of, unless their actions reach to a level “gross negligence” or outright fraud.We are not aware of any external manager ever having to pay or repay the BDC shareholders under its charge due to avowed gross negligence or fraud.
  • In the case of FSC-even if the litigation ends in a settlement-the shareholders of the BDC (and its insurance company) will be paying the legal bills involved.
  • In this regard, FSC is no different than all the other externally managed BDCs (and the internally managed ones as well). The BDC Activist would like to see the Boards of BDCs negotiate with the external managers-at the time of the annual advisory agreement renewals-an exception to the hold harmless arrangements for lawsuits such as these. The manager should be required to pay-either in a lump sum or as a deduction from the management fee over a year period-any legal costs and any judgement where their actions were found by a court of law to have been inappropriate.
  • We will add references to “snowballs” and “hell” to suggest how likely even an attempt  by the  Boards of  BDCs to include such a provision in investment advisory agreements. Nonetheless, the FSC case, and the proposed waiver equal to the legal costs, demonstrates that such an approach is not unreasonable. If an external manager is to have complete control of a BDC, supply all its senior management and staff, undertake its asset valuations etc, not to mention pick its “independent directors” (see the August 23 post about TCP Capital), shareholders should not be left on the hook for egregious actions outside of the ordinary course of business.
    •  What really matters are the measures intended to create better corporate governance. The proposed settlement calls for disclosure of executive compensation (Fifth Street’s managers are technically employed by Fifth Street Asset Management (NASDAQ:FSAM), obscuring their compensation). It would also require that the company’s board of directors hold a specified amount of company stock, and establish better processes and committees for managing the risks in the company’s investment portfolio.We add: The BDC Activist is not particularly interested  about increased disclosures of executive compensation, except out of prurient interest.  We doubt the data would be very useful as most external managers manage multiple funds. Plus, there’s the distinction between the executives of the external managers and those who are both executives and owners (such as Leo Tannenbaum, who was at one time CEO of two Fifth Street BDCs, an owner of stock and the principal owner of the management company). If shareholders want to be told that the external manager makes a heap of money all they have to do is look at the existing reporting on management and incentive fees in any quarterly filing.
    • As for requiring Board members to own a certain amount of stock, we’re ambivalent. Would that really cause the directors to act on behalf of shareholders (as they are supposed to do in the fairy tale of public company corporate governance) or would other factors cause the appointed guardians of the BDCs to support-Soviet Style-whatever the external manager proposes ? We are concerned about the law of unintended consequences. Would directors fees suddenly increase to compensate for the additional cost of having to buy shares ? Would qualified candidates stand down if this requirement was imposed on them ?
    • The real meat and potatoes is the mention of enhanced director independence. Depending on the specific terms of this enhancement, it could require that the board is comprised of truly independent directors with limited or no ties to the company’s external manager.
    • The BDC Activist recognizes that this is the Holy Grail of corporate governance: a Board of Directors, representing shareholders, who will negotiate with the external manager on an arm’s length basis and be prepared to say no to excessive fee arrangements (how some BDCs can justify a 2% asset fee and a 20% incentive when others are at 0.8% and no incentive fee is remarkable); dilutive equity raises and non-accretive debt financings; over-concentration in sectors or companies; co-investing with sister funds to the benefit of the manager but with no benefit to the BDC, etc.
    • However, we also recognize that nobody ever did find the Holy Grail in medieval times (whatever Monty Python says) and identifying truly “independent” directors may come to the same end.
    • We’re certainly not convinced (as our comments below will reflect) that “activist shareholders” with big-but still minority-positions in the stock are the best source of these “independent” directors.
    • Theoretically, a new board of directors free of conflicts of interest could encourage Fifth Street Finance to seek a new manager altogether, almost certainly on less-expensive terms that would result in better returns for shareholders.
    • Remember, activist investor RiverNorth aggressively pushed to find a new manager in its short-lived activist campaign against the company earlier this year.
    • BDC Activist: Then sold out on favorable terms when the opportunity arose leaving Regular Joe shareholders with all the bills involved, and a pile of press releases for the scrapbook.
    • A less expensive fee agreement is by far one of the most important drivers for the company’s earnings, and ultimately shareholder returns.Fifth Street Finance CEO Todd Owens remarked on the company’s conference call that it is considering a fee agreement with better terms, suggesting that it may be unveiled in the upcoming quarter. I take that to mean that the so-called “enhancements” to the board of directors have some teeth — that Fifth Street Asset Management feels compelled to roll out a new fee agreement suggests to me that they’re expecting the process of choosing a manager to be much more competitive.What about the SEC?
    • BDC Activist: Sad that even the possibility of a management fee cut requires a major lawsuit to occur.
    •  Even if the parties involved in the class action settlement sign on the dotted line, Fifth Street Finance and affiliated entities will remain under the microscope. The SEC sent subpoenas and document preservation notices to the Fifth Street entities in March for an investigation of many of the companies’ business practices. In particular, the SEC has its sights set on the valuation of Fifth Street Finance’s assets, expenses allocated between the companies, as well as statements and/or potential omissions from the entities’ SEC filings, among other items.And while one would naturally assume that this investigation would primarily relate to Fifth Street Asset Management — the company that manages Fifth Street Finance for a fee — it’s quite possible that some of the costs of complying with SEC requests for information may fall on Fifth Street Finance’s shoulders, negatively affecting its earnings.

      Fifth Street didn’t break out the buckets into which its increased expenses fall (shareholder lawsuit or SEC investigation), and it remains to be seen if the additional expenses will be covered by the company’s insurance coverage.

      A settlement and increased scrutiny from the SEC could be just what Fifth Street Finance needs to start managing the company for the benefit of its shareholders, rather than its highly paid managers. But for as long as inquiries into its business practices persist, one should expect earnings to be negatively affected by increased operating expenses. Lawyers, unfortunately, don’t come cheap…

    • FSC
    • Source: Fifth Street Finance Corp.’s SEC Problems Could Cost Shareholders — The Motley Fool
    Warren Resources Inc.: Reports July Results Thu, 25 Aug 2016 15:04:14 +0000
  • August 24, 2016: Bankrupt oil and gas driller Warren Resources reported bankruptcy court required results for July 2016.
  • As the regulatory filing emphasizes, the Monthly Operating Report is limited in scope, is not independently audited and cannot be overly relied upon.
  • This was the first full month for the Company since filing for bankruptcy on June 2, 2016, but results are available for both months.
  • Highlights: Revenues were higher in July than June, reaching $5.7mn, from $5.0mn.
  • Income Before Interest and Depreciation (IBID turned slightly positive but Net Income losses continue to be huge.
  • IBID gain may have been due to lower Repairs, Maintenance & Supplies.
  • The Company’s cash position remains unchanged at $11mn.
  • Reorganization fees were approaching $900K in July, equal to about half of Gross Profit. Law firm Kirkland and Ellis LLP received $775K.
  • Source: Form 8-K.
  • The BDC Credit Reporter has been alerting readers since May 11, 2016 about Warren Resources. This is an Update.
  • Says:” The July Monthly Operating Report does not alter our concern about the profitability of the Company under any capital structure”.
  • Adds: “Press reports that management/pre-bankruptcy lenders may be looking for debt free structure post bankruptcy might be more out of necessity than choice”.
  • BDC exposure remains Major at $235mn, all by 4 FS Investment funds. All are on non-accrual.
  • Advantage Data
    Advantage Data
  • The Senior Debt held was written down another 10% to 30% off Cost at June 30 2016.
  • BDC Credit Reporter says: “There may yet be another step down in valuation, depending on final terms of Chapter 11 exit. We expect even less debt than initially announced for Company post-bankruptcy”.
  • FSIC, FSIC II, FSIC III, FS Powerr & Energy.
  • FS Investments Logo
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    News Wrap-Up: Wednesday August 24, 2016 Wed, 24 Aug 2016 21:38:15 +0000
  • August 24, 2016: (After Close)  Very little going on in the last few days of August. Here is what we noted:
  • Red Arrow DownMajor Movers: We look for any stock moving more than 3% up or down on the day. The Biggest And Only Loser in this category was OHA Investment (OHAI): down -3.3% to $2.61. We wrote about the huge run-up in this energy-oriented BDC’s stock just two days ago. This may be profit taking.

    Protest Fists In AirIn BDC Activist-related News (see the Activist tabs for lots of content) TCP Capital appointed a new “independent” director. We noted as much on Twitter, but had no room to point out that the highly qualified new director (Freddie Reiss)  of the BDC is no stranger to the external manager (Tennenbaum Capital Partners) who appointed him to the 7 person Board. Mr Reiss has served previously on another Tennenbaum fund (the T in TCPC). (He’s also a current director at a public Ares Capital fund).

    To the BDC Activist Mr Reiss seems a “safe pair of hands” as a director, with plenty of relevant experience (he is a CPA after all !). However, we cannot help pointing out that the very Board members who are supposed to defend shareholder interests and negotiate at an arm’s length with a BDC’s External Manager such contentious issues as compensation, risk management, capital raising and dividend policy are picked by that very same External Manager.  How vigorous a defense of shareholder interests can be expected under those circumstances when External Manager and stockholders are at variance ? It’s the obvious contradiction at the very heart of BDC corporate governance, and TCPC is no different than any other player in stacking its “independent” Board members with individuals that are well known to them, and with whom they have a prior profitable relationship.

    Triangle Capital (TCAP) announced a $0.45 quarterly dividend, as expected for the third quarter of 2016. Remember, though, that the Company was paying a quarterly distribution of $0.59 ($0.54Falling from tall building + a $0.05 Special Dividend) earlier in the year, until announcing the first ever cut in its pay-out a few months ago.  This is the second distribution in a row at the $0.45 level.

    Notwithstanding the cut in the pay-out, the Company was able to raise additional capital last month at a price just under $20.0. Quite an accomplishment, but the BDC Reporter remembers this former high flier saw it’s stock price top $30.0 just three years ago. TCAP faltered when several portfolio companies went into default around the same time, which eventually affected both NAV and recurring income. Just a reminder that Credit Matters. (That’s a clumsy plug for the BDC Credit Reporter).



    Question MarkFinally, we’re intrigued by the continuing rise in TICC Capital’s (TICC) stock price. Today, TICC ended at $6.41, up 2.7%. That’s the highest price YTD, and only marginally behind the NAV. The rise has occurred even as TPG Specialty (TSLX) continues to gain support for the firing of the External Manager (BDC Partners) at the September Shareholders Meeting. Does Mr. Market believe the External Manager will be fired and that will unlock value in the stock. If so-with the gap between the price and Net Asset Value narrowing, the upside from here seems modest. Or does Mr Market believe-as we do-that the existing Manager will survive this challenge-and will continue its high dividend policy to the delight of some shareholders ?  We have no idea. However at $7 or above, Southland Capital Management-the parent of the BDC Reporter and the one with the money to spend-will be considering a “Short” position again. Longer term, we believe both NAV and the distribution will drop as TICC is already at full stretch, even if the CLO market remains stable. If we get a hiccup in CLO prices and cash flow (yes,  there is a relationship Virginia), TICC Capital’s value could drop fast. That may be one our investment ideas, which the BDC Reporter has a whole section devoted to, but we’ve been short of inspiration of late.

    Four Point Energy LLC : Recent Restructuring: Questions Wed, 24 Aug 2016 16:28:04 +0000
  • August 24, 2016: Four Point Energy LLC, a major oil and gas company, was restructured and refinanced in recent weeks.
  • Details are sparse and come principally from its BDC lenders, including FS Investment (FSIC).
  • The Company was discussed on the FSIC earnings Conference Call on August 10,2016 and in a more general FS Investment press release on August 23rd. See below.
  • The August 23 press release said: “FourPoint Energy FSIC, FSIC II and FSEP provided an upsized equity commitment to FourPoint Energy, a Denver, CO-headquartered private oil and gas exploration and production company. The new equity investment served to recapitalize and solidify FourPoint’s balance sheet and provided financing for its acquisition of new acreage. With over 875,000 net acres and over 3,000 potential drilling locations, FourPoint is the largest operator in the Western Anadarko Basin. FourPoint is a portfolio company of EIG Partners, a Washington D.C.-headquartered global energy investment firm.”
  • The BDC Credit Reporter analyzed the publicly available data, including investment ownership filings supplied by Advantage Data (
  • Advantage Data.
    Advantage Data.
  • Not mentioned by FSIC but clear from Advantage Data results, the existing 2020 Secured Debt has been extended another year to mature 12-31-2021, and the interest rate changed (increased from 8.0% to 9.0%).
  • Total exposure by FS Investment traded and non-traded BDC funds (but managed by GSO Blackstone) was huge before restructuring at over half a billion dollars.
  • Now increased by approx $75mn to nearly $650mn, spread over senior secured debt and equity.
  • However, BDC debt exposure (i.e. safest position on balance sheet) has been reduced by $100mn to $345mn from $455mn, spread among 3 FS Investment BDCs.
  • Unanswered question: Was a portion of secured debt converted to Equity (see below) ?
  • Rest of BDC exposure is in various tranches of Equity.
  • Valuation of assets by GSO/FS Investments is confusing:
  • -Senior Secured Debt,which had been valued at 20% discount to Cost in IQ 2016 now valued at par, even though maturity has been extended (see above).
  • -“New” Equity Tranches created by the restructuring are carried at 50%+ premiums to Cost. Also treated as debt for tax purposes.
  • -Older Equity tranches are still carried at big discounts to par. For example: $21mn of Equity from FSIC was valued at $6.9mn in IQ 2016 and now at $8.3mn as of June 2016.
  • Unusual valuation situation of having equity tranches in same investment valued at both very large discounts and premiums.
  • BDC Credit Reporter says: “The FS Investments group’s overall exposure to Four Point is huge and growing”.
  • Adds: “We have a suspicion that the restructuring-recapitalization of Four Points in the IIQ of 2016 had more to do with boosting asset values for FS Investments funds rather than any material change in investment credit strength”.
  • Adds: “However, we are keeping an open mind while gathering more data about the restructuring. More information about the financial performance of the Company would be useful”.
  • Disclosure: Our parent-Southland Capital Management-is short FSIC.
  • Source: FS Investments Closes on over $830 Million of Q2 Middle Market Commitments
  • FSIC, FSIC II, FS Energy & Power
  • Question Mark
  • ]]>
    Fifth Street Finance: Industry Diversification Wed, 24 Aug 2016 14:28:43 +0000 August 24, 2016: Fifth Street Finance published a Shareholder Presentation for the quarter ended June 2016. (Not yet available on website).

    Included are pages on the “diversification” of the BDC’s portfolio.

    FSC has loans to 133 borrowers, relatively high for a BDC of its size ($2.2bn in assets).

    BDC Credit Reporter says: “Not convinced that Fifth Street appropriately diversified either by investment size or by sector:

    As per presentation, top ten investments account for 27.5% of total investments versus 7.5% if each investment was equal sized.

    Top Ten account for 57% of FSC Net Assets (i.e. Equity).

    Concentration by sector (often called Verticals) even worse:

    Top 4 sectors account for 10% or more of Fifth Street’s assets and 74% in aggregate.

    Notable: 23% in Information Technology.

    Just imagine if this was June 2014 and that concentration had been “Oil & Gas”….

    BDC Credit Reporter last word:” Investment & Sector concentration leaves FSC-or any BDC- vulnerable to huge credit shocks”.

    Distress Man