BDC News Of The Day: April 17, 2017
Here are the main news items and SEC filings from all the publicly traded BDCs that we track for Monday April 17, 2017 at 11:30 am EST. External links to articles or filings are in blue, internal links to BDC Reporter’s prior posts on the subject are in red. Where appropriate, we add brief comments. Only 3 items today, which has given the BDC Reporter time to comment extensively about a routine – but telling – press release from Hercules Capital (HTGC); discuss WhiteHorse Finance’s (WHF) Watch List in anticipation of the just released next earnings date and once again discuss the misalignment between those who manage some BDCs and those who invest in them, using an insider purchase at FS Investment Corporation (FSIC) as a case in point.
Hercules Capital (HTGC): Provides Interim Portfolio Update For IQ 2017
HTGC, along with the other two technology lending BDCs and a small band of other peers, issue a press release every quarter with a high level update on developments in their portfolios in the just completed quarter. As we’ve said in the past, the usefulness to shareholders or prospective investors is variable at best, as much of the content is informercial-like, which appears to be the principal intent: boost the stock price by providing whatever positive news is available and staying silent on issues that might be more problematic. However, HTGC’s quarterly missives do contain a great deal of information worth knowing, and deserve a longer look even if the overall tone remains marketing oriented.
HTGC reported closing $190.7mn in new debt & equity commitments. For those of you keeping score regularly at home that’s on the low side compared to other periods. For example, a year ago the corresponding commitments number was $220.9mn. However, the CEO of HTGC, Manuel Henriquez, had previously guided investors to expect a below average production number on the IVQ 2016 Conference Call a few weeks ago. That’s partly a function of the first quarter being a slower period than the other three parts of the year, and partly as part of the BDC’s deliberate portfolio building strategy. Mr Henriquez appears to have been concerned about what the new administration policies might mean for the venture companies which HTGC finances and has not been in a hurry to boost assets until a clear picture has emerged. With our college education all those years ago spent on recent history and international relations, we’re trained on reading between the lines of communiques and official pronouncements. When Mr Henriquez says in the press release that HTGC is “guardedly optimistic”, we can’t help reading that as meaning still worried about what might be coming next.
On the other hand, the BDC Reporter points out that it’s very hard for any BDC to take a drastic “view” of where its markets might be going as any material reduction in portfolio size can affect the distribution level and shareholder enthusiasm. In this regard, HTGC and all other publicly traded BDCs, are caught between the devil and the deep blue sea. Unlike the probably apocryphal story of Joe Kennedy selling all his shares in advance of the Great Depression after being given stock tips by a shoe shine boy, publicly traded companies do not have the flexibility for such bold moves.
We don’t actually know from the press release if HTGC’s overall portfolio size increased or decreased in the month. As the BDC frequently reminds shareholders, the commitments made are not fully drawn immediately and many will never be drawn. We do know from the press release the dollar amount of the quarter’s unscheduled repayments:
As of March 31, 2017, Hercules received $100.3 million in unscheduled early principal repayments “early pay-offs.”
However, that’s not the full picture on the repayment side, as no number is given for scheduled principal repayments… So your guess about the size of HTGC’s portfolio at the end of the IQ 2017 is as good as ours.
Other highlights from the press release:
- We can’t help noticing that – unlike a year ago -no commitments were made to the Sustainable and Renewable Technology portfolio. In the 2016 first quarter the number was $25mn. That might not reflect any change in the attractiveness of the sector in HTGC’s eyes given that deals do not occur quarterly like clockwork, but might fit with taking a view on the new administration.
- For investors who look for potential equity upside -which HTGC quietly encourages in its press releases – there are 6 companies in portfolio which are filing to go public, versus 4 a year ago. Of course, without any details about who that might be and the amounts involved and a handicap sheet about the probability of success (which is a lot to ask for even from the BDC Reporter) that tells readers really nothing except that 6 is a bigger number than 4.
- HTGC provides a good amount of detail about transactions that have occurred or progressed during the quarter. If nothing else, if you’re a regular reader a picture forms of the type of transactions, and the range of businesses, in which the BDC is involved from what seems obvious like pharmaceuticals, to less obvious like “a leading online marketplace for used heavy equipment and other durable assets”. The BDC Reporter believes that any BDC is best known by digging into the size and character of its portfolio companies, and readers can certainly get an inkling just from being a frequent reader of these press releases.
- There is even a small amount of useful news in these brief transaction outlines. The BDC Credit Reporter learned a little more about what’s happening to HTGC’s position in the one of the more famous retail bankruptcies in recent months: the Chapter 11 saga of Nasty Gal. Apparently – and much to our surprise based on what we’d read earlier- HTGC is likely to receive full repayment of its $13mn outstanding to the iconic women’s boutique, which has been bought by BooHoo.com (we could not make up these names if we wanted to). What’s more, HTGC shareholders will take a special interest in a new Netflix series based on the business life (and much else besides one assumes) of Nasty Gal’s founder. Check out the trailer here. More prosaically, though, the valuation may not change as Advantage Data’s records show the investment was already carried at full value at 12-31-2016.
- Plus, HTGC indicated that another under-performing company -Jumpstart Games- might be in the process of being sold. We checked the Advantage Data records and HTGC had $14mn at cost invested in Jumpstart, and had written its First Lien Debt down by 57% at year end 2016. If all goes well- and HTGC made clear that nothing was inked yet- there might be a write-up of that deal.
- However, the BDC is being more coy about what’s happening at Sungevity, to which HTGC made an above average investment in of $68mn at cost, and has gotten burned by a March 2017 bankruptcy filing. HTGC has written down its Preferred to zero and its senior debt by 25% at year end 2016. Our informed guess – we keep up with such things at the BDC Credit Reporter- is that additional write-downs might be in the cards. We will just quote from the press release and leave it to you to read between the lines. You’ll notice, though, that when there’s bad news to impart no dollar amounts are quoted, which is the opposite of what usually happens when a sale or refinance is highlighted. As we said, this is half shareholder disclosure, half marketing material at the very most.
“In March 2017, Hercules’ portfolio company Sungevity, Inc. announced that it had commenced voluntary Chapter 11 proceedings in the U.S. Bankruptcy Court for the District of Delaware, in order to facilitate a financial and corporate restructuring to strengthen their balance sheet and recapitalize the company. During the Chapter 11 proceedings, the company expects operations to continue uninterrupted. In connection with the restructuring process, and under Section 363 of the Bankruptcy Code, Sungevity entered into an asset purchase agreement with a group of investors, led by Northern Pacific Group. On April 7, 2017, the U.S. Bankruptcy Court approved Sungevity’s DIP financing facility on a final basis”.
WhiteHorse Finance (WHF): Announces IQ 2017 Earnings Release Date.
The H.I.G. Capital affiliated BDC will be releasing its quarterly results before the open on May 5th, 2017.
The BDC Reporter is looking forward to getting an update on the BDC, which has just over $400mn of investment assets. Like most every BDC out there, WHF’s stock price has been trending towards its all time high after being in the dumps just a year ago, and trades around $14.00, above the $13.63 Net Asset Value Per Share at year end 2016. As per our usual, we will be more interested in WHF’s risk profile and portfolio credit performance than whether the earnings for the quarter are a couple of cents higher or lower than anticipated by Wall Street. In any case, WHF has been doing well by that measure with 2016’s Net Investment Income Per Share at $1.48 and the distribution-which has been very constant- at $1.42, as per the latest earnings release. The IVQ 2016 Net Investment Income Per Share was $0.358 and the distribution $0.355 for those of you interested in the headline numbers.
However, what matters is the future and that will depend largely on credit quality. Unlike many other BDCs we’ve been tracking and writing about, WHF’s Watch List is blessedly short at the moment. (Less work for the BDC Credit Reporter and less to worry about for shareholders). One Watch List investment which is getting an upgrade is ProPetro Services, to which WHF has an $8.2mn First Lien Secured Term Loan at cost, and which was valued at $7.2mn in the IVQ 2016. However, ProPetro has subsequently raised new equity capital in the public markets, paid off its Revolver and impressed the analysts. Chances are the Term Loan is either repaid in full or revalued at par in the IQ 2017.
The jury is still out on Grupo Hima San Pablo, an operator of hospital chains in Puerto Rico, whose geographic focus tells you all you need to know about the risk involved. (In any case, there’s very little public information available). The valuation trends-and the hospital company’s debt is held by 4 BDCs with $41mn in aggregate exposure-are marginally down. WHF has both first lien and second lien exposure, but virtually all in the former, so the $15.5mn at risk is no great concern at the moment. Both facilities receive the BDC Credit Reporter’s Loan Credit Rating of 3, our highest Watch List rating, which assumes odds are much better than not of a full recovery of amounts advanced.
We remain optimistic for the moment about Caelus Energy Alaska – a pure play oil and gas explorer and producer operating in some of the coldest climate on earth. Caelus is a very vocal player on the Alaskan oil scene and made the headlines last year with the announcement of a major oil find in the far reaches of the frozen north. Nonetheless, that opportunity is far from making any current contribution, and the second lien debt of $12.9mn has been written down by a third. If oil prices hold up, WHF has a very good chance of getting repaid at maturity in 2020, or even before. Rightly or wrongly, capital is flowing back into energy, which is giving both the company and WHF options about what to do next. The loan is performing. We have a CCR of 3.
The biggest eyesore on WHF’s books is the $20.7mn investment in the Aretec Group (mistakenly spelled Artec Group in the latest 10-K). The company was formerly known as RCS Capital, underwent a Chapter 11 re-organization in 2016, and is valued at $7.5mn, and is non income producing. This is another example of a BDC maintaining an interest in a busted borrower, a subject the BDC Reporter comments only too frequently. In this case, WHF had a Second Lien loan exposure from 2014, but placed the debt on non-accrual as far back as the IVQ 2015. As part of the restructuring WHF has received an equity stake, whose value has remained unchanged since Chapter 11 was exited 2 quarters ago. We have very little information about the outlook for WHF’s new position so it’s hard to evaluate if shareholders will ever get any recoupment of the unrealized depreciation on the books, which accounts for three quarters of the BDC’s total.
Overall, the good news for WHF is that none of the 3 performing Watch List names appear to be in any imminent danger of going into non-accrual and affecting Net Investment Income or the distribution. If the Aretec investments ever get sold, there’s a chance of the proceeds being re-invested into an income producing investment. Of course, there’s always the possibility of credit troubles at one of WHF’s 25 other non-Watch List companies. The BDC Credit Reporter’s early warning credit system does not yet extend to every company in the portfolio, although we’re working on tracking all 6,000 companies to which BDCs have exposure. Looking down the relatively short list, there are a number of names that bear watching (as you’d expect with a BDC which makes loans in the 10-13% yield category and which has a large proportion of second lien investments). Recently WHF dodged a bullet with Fox Rent A Car, but that non accruing loan has been restructured and returned to accruing status in short order. There’s second lien exposure to consumer finance and to a retail chain in Minnesota and to a prison phone system operator (prosaically called “Integrated Telecommunication Services”), all of which one could make an argument for worrying about. We will see what the latest 10-Q has to say on May 5th or shortly thereafter.
FS Investment (FSIC): Filed Form 4 : Change in Beneficial Ownership.
An FSIC Director-Gregory Chandler- acquired 1,050 shares in their spouse’s name at a price of $9.5 on 4-13-2017 through a 401-K. Through one indirect form or another Mr Chandler and his family own about 16,000 shares in the public BDC of the investment management giant.
As the FSIC Proxy shows on page 4, the 18 officers and directors associated with the company own between them 2,457,345 shares (before this latest purchase), about 1% of total shares outstanding. For investors who like to see a lot of “skin in the game” from their managers and directors that’s not very impressive. The total value of the shares held is under $25mn. By contrast, in the past 3 years, the FS Investments organization has earned nearly ten times as much in Management and Incentive Fees.
That’s the problem with funds owned by these huge asset management companies in the eyes of the BDC Reporter: the Investment Advisor, their officers and hand picked Directors are in a no lose position where investment performance is concerned given their modest exposure to the common stock. If everything goes well, they will be harvesting $125mn in asset management fees, roughly $2.5mn in distributions from their shares owned and a modest increase in the value. If all goes poorly the asset manager group will probably still be garnering well over $100mn in fees of one kind or another, a few hundred thousand less in distributions and a lower stock value to the tune of $2.5mn-$7.5mn. By contrast shareholders face the risk of seeing their own distributions and share value drop by a third or more if and when things go awry for a BDC. To even pretend there’s an alignment of interests between Manager and Shareholder appears highly debatable (we’ve been struggling about how to word this) given the wide discrepancy in incentives. At best shareholders must hope that their asset manager is sensible and does not overly abuse a system that is already heavily weighted towards an Investment Advisor who already receives a third of the BDC’s recurring earnings while having a minuscule amount of its own capital at risk.