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THL Credit: Unsecured Note Expenses

THL Credit (TCRD) filed an amendment to the Registration Statement for their recent $25mn Note issuance.

The $25mn was a top-off of the existing 2022 Unsecured Notes maturing in 2022.

The amendment broke down the expenses associated with the recent placement.

All-in the cost to the BDC: $727,887, or 2.9% of the capital raised.

No portion of the cost was borne by the External Manager.

The expenses are equal to just under 0.45% of the capital raised per annum.

However, placement fees are not included in the above number.

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The BDC Activist was not a fan of TCRD’s  recent Unsecured Note capital raise.

We spelled out on November 16, 2016 in excruciating detail how the new debt capital is non-accretive.

At the time, we estimated the fees would push the all-in cost to “closer to 7.0%”.

In fact, with the expenses (and before the placement fees even !), the all-in cost is 7.20%.

(The cost will be even higher if the Notes get redeemed early and all those costs get spread over a shorter period).

Throw in the placement costs and this new debt might be costing the BDC over 7.75%.

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To keep perspective we keep a Report Card on every BDC and grade on key issues of interest to shareholders.

Historically, TCRD’s behavior where CAPITAL raising has been concerned was relatively good.

The External Manager has avoided the temptation over 6 years of raising equity below Net Asset Value.

However, we weren’t delighted-from a shareholder’s perspective- about the two prior Unsecured Notes issued.

Both TCRX and TCRZ (issued in 2014 and 2015) bore nominal yields of 6.75%, and had similar all-in costs.

At the time, though, portfolio yields were high, and seemed sustainable, so we dinged TCRD only 1 notch.

THL Credit’s grade on capital raising was a B.

Now with TCRD’s portfolio yields dropping due to spread compression and a strategic change towards “safer” investments, the all-in cost of the obligations-even before taking into account Incentive Fees and bad debts (which have been spiking)-are probably as high as any assets that will be acquired with the net proceeds from these new Notes.

This is going to quietly cost shareholders in higher interest expense.

As a result, our overall grade for THL Credit’s shareholder “friendliness”  where capital raising is concerned drops:

To a C.

[We grade on the traditional A to F scale].