BDC News Of The Day: April 11, 2017
Here are the main news items and SEC filings from all the publicly traded BDCs that we track for Tuesday April 11, 2017 at 10:45 a.m. EST. External links to articles or filings are in blue, internal links to BDC Reporter’s prior posts on the subject are in red. We’ve managed to cover every item on the docket except an Amended Statement of Ownership at Stellus Capital Investment (SCM), where a 5% shareholder sold down slightly to a 4.9% position triggering a filing requirement, which did not seem very important. Instead, we spilled most of today’s digital link reviewing a press release from BDC giant FS Investments, discussing their big ticket loan strategy. That includes FS Investment Corporation (FSIC), the only publicly traded BDC in the group. We also discussed Golub Capital’s (GBDC) similar announcement and provided the timing of the Medley Capital (MCC) earnings release and a warning about what might be coming down the pike for shareholders of that beaten up BDC.
FS Investment Corporation (FSIC): Issued press release announced total commitments in IVQ 2016 from its BDC platform.
FS Investments is the mega asset manager which controls FSIC and 4 other non-traded Business Development Companies. Every quarter FS Investments issues a press release mentioning the total capital committed to lending and investing in portfolio companies across its platform. In the IIIQ of 2016, “nearly a billion dollars” was committed. On April 10th, the number given for the IVQ 2016 (in an inexplicably long delay between quarter end and announcement) was “more than $1.7 billion” and $4 billion for the year.
This does not provide FSIC shareholders with much in the way of news they can use as commitments are not broken down by fund. Nor does the press release discuss repayments, which could be pertinent. (If the headline was ” FS Investments books $4bn and receives $5bn back” this would be more intriguing). However, this is a commercial and not a shareholder disclosure so FS Investments can say whatever they like, and more power to them. Highlighted in the press release are just two transactions: Addison Group and Empire Today (you’ve heard the jingle). We couldn’t find anything about the former in Advantage Data’s normally comprehensive database of every BDC loan out there. However, Empire Today LLC was featured. At year end 2016, FS Investments funds were the only BDCs with exposure, which was just in the 2022 Senior Secured Unitranche facility and was priced at LIBOR + 800. There were 3 FS Investments entities involved, including FSIC (which is the only entity in the BDC Reporter’s coverage universe) , with an aggregate $217mn invested, which is on the high end in BDC-land. As the screen shot from Advantage Data’s vault shows, FSIC had $82mn invested in the just completed acquisition.
This is a good example of how the FS Investments business strategy (which is actually managed by Blackstone’s credit group called GSO) operates. Very often some or all the funds in the FS Investments group band together to underwrite a goodly portion (if not all) a whole tranche of the debt of larger sized borrowers. Putting together FSIC’s latest 10-K disclosure that the average EBITDA size of its borrowers is $68mn and an article today that we quoted on Twitter from Bloomberg which says the average M&A multiple has been 11x EBITDA in the last few years, the enterprise value of many portfolio companies are three quarters of a billion dollars. Obviously some will be larger and some smaller. However, we are clearly a long way from the lower middle market (OFS Capital-which is an SBIC lender which specializes in the smaller sized companies recently mentioned that the average EBITDA of its portfolio companies is $8mn. FS Investments borrowers are 8x larger in EBITDA size and probably 15x or more greater in enterprise value). FS Investments is not even operating in the middle market, the segment which BDCs typically claim to be servicing.
Still, even for one of the biggest public BDCs like FSIC an Empire Today transaction would be hard to swallow all by itself. A $217mn loan would represent 10% of FSIC’s equity at year end 2016). To be able to play in this large cap segment of the market (by BDC Reporter’s definition thereof) this internal club deal strategy between FS Investments funds is necessary. There are dozens of other examples across the platform and this approach has expanded a segment of the market where BDCs rarely played in the past. Moreover, GSO Blackstone likes to keep the debt in the family in order to keep control and have a united front towards the borrower should things go awry, as well as showing the sponsor (in this case H.I.G Capital) that they have the ability to underwrite very large deal sizes (this one deal is the size of some of the smaller BDCs out there). Still, even broken down between several sister funds the amounts committed per BDC are still on the high side, as FS Investments/GSO are more comfortable than BDCs like Golub Capital (which also uses its platform to underwrite larger deals and then doles out pieces) holding on to relatively large positions. Is this a “good” strategic approach ? The BDC Reporter has its own preferences, but the objective answer is not yet clear because we’ve not been through a full credit cycle with this focus on the large cap market. FS Investments certainly stumbled with its over weighted exposure to energy-which we discussed yesterday-and that has been reflected in FSIC’s average or below recent fundamental performance. Still, the jury is out.
Golub Capital (GBDC) : Issued press release announcing new loan originations in IQ 2017.
The Golub organization, too, is intent on letting investors know what they’ve been up to-in this case in the first quarter- and only at its public BDC: GBDC. Here is the meat of the press release:
“Golub Capital BDC, Inc. (NASDAQ: GBDC, www.golubcapitalbdc.com), a business development company, today announced that it originated $97.1 million in new middle-market investment commitments during the three months ended March 31, 2017. Approximately 42% of the new middle-market investment commitments were one stop loans, 57% were senior secured loans and approximately 1% were equity securities. Of the new middle-market investment commitments, $94.7 million funded at close. In addition, during the three months ended March 31, 2017, Golub Capital BDC, Inc. invested $8.9 million in Senior Loan Fund LLC, an unconsolidated Delaware limited liability company (“SLF”), that invests in senior secured loans and is co-managed by Golub Capital BDC, Inc. and RGA Reinsurance Company.
Total investments at fair value are estimated to have increased by approximately 2.2%, or $37.7 million, during the three months ended March 31, 2017 after factoring in debt repayments, sales of securities, net fundings on revolvers and net change in unrealized gains (losses). Total investments at fair value held by SLF are estimated to have increased by approximately 5.2%, or $17.4 million, after factoring in debt repayments, sales of securities, net fundings on revolvers and net change in unrealized gains (losses).”
To their credit, GBDC references not only originations, but also repayments. Furthermore, the break-down between GBDC and its JV is useful to shareholders. We now know the JV continues to be a major motor of asset growth. That’s important given that GBDC has recently raised new equity and there will be more mouths to feed. Still a 2.2% aggregate increase in total investments at fair value does suggest that growing the portfolio is no easy task in this environment where every Tom, Dick and Harry wants to be a lender. Even more importantly, the press release omitted (as they are prone to do) any information about what investment yield is being generated from this apparently safer than usual batch of loans (57% in senior secured). Readers will know that the BDC Reporter is concerned about a Spread Compression apocalypse (“Compress-alypse” ?) underway in leveraged lending, but Golub’s press release did not give us any insight into that trend.
On the same day, GBDC also announced the date of its next earnings release and the Conference Call details that follow. We’ll learn more on May 4th.
Medley Capital (MCC): Issued press release announcing earnings release date.
The coming earnings release from MCC, before the open on May 9th, should be interesting. Nervous shareholders may want to calendar the release. Here is the key issue to consider in the short run:
Will MCC reduce its dividend from $0.22 from the IIQ 2017 (down from $0.37 at the end of 2014, and $0.30 as recently as IIQ 2016) ?
Sadly, the BDC Reporter believes the odds are high. Very high.
Already, the obvious metrics are looking bad. In the IVQ of 2016 Net Investment Income Per Share was already down at $0.19. Dig a little deeper and the 10-Q reveals that even much of that income is in the form of Pay-In-Kind (which has more than doubled on a quarterly basis in the last year). That means MCC has to sell assets or borrow against them to pay its cash expenses and distributions. However, leverage is already at the BDC’s self imposed regulatory limit (o.7x Debt To Equity) and at 1 to 1 when SBIC is not arbitrarily removed from the calculation. That big wad of cash you see on the balance sheet is sitting in the SBIC subsidiary looking for new deals, which has been a challenge for the Medley credit organization, and is not available to pay out as a distribution.
Speaking of credit, MCC has an above average level of trouble on its hands. There are 60 companies in the portfolio. The BDC Reporter counts 17 of those as under-performing and on our Watch List. According to MCC’s own calculations 27.4% of the portfolio at fair market value is under-performing against initial expectations. That’s more than doubled in the last year. At the end of 2015 that was 10.9%.
Non accruals are very high: “At December 31st, 6.6% of the portfolio was on non-accrual.” By the way you won’t find that stat in the last quarterly earnings release (we checked) but is drawn from the Conference Call and the 10-Q. No less than 10 of the 60 companies on the books are on non-accrual, one of the highest percentages we’ve seen in recent years.
Management claimed on the last CC that progress was being made on turning round the portfolio (without ever admitting that MCC has a credit problem of mammoth proportions on its hands). Investments are being sold/liquidated (Essex Crane) and restructured, with debt swapped for equity. We wish them well but “cleaning up” MCC is going to take many quarters and the prospect of much in the way of Realized Losses yet to come. The fair market value of our Watch List names is equal to more than 20% of MCC’s capital at par and over 30% at current value. That does not augur well for NAV, and most importantly for the sustainability of earnings and the dividend, especially for a BDC already leveraged to the hilt, and with relatively expensive Revolver borrowings (3.7%) and Baby Bonds (6% +).
If the distribution gets cut (and we’re hardly breaking new ground by assuming the chances are high), the key question will be: how much ? The BDC Reporter has not done any fancy modelling like our friends in the analyst community (partly because we don’t have the time and partly because dividend cuts involve a plethora of factors, many of which are not quantitative) but we predict a reduction to $0.15 a quarter. The stock is currently at $7.73. Even in this over-heated market environment that might engender a stock drop of $1 or more. We stress that’s we’re just spit balling here.