BDC News Of The Day: April 12, 2017
Here are the main news items and SEC filings from all the publicly traded BDCs that we track for Wednesday April 12, 2017 at 10:00 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 a couple of disclosures from Prospect Capital (PSEC). One is a Form 8-K summarizing the BDC’s recent Convertible Note offering, which we’ve covered all the details of previously. The second PSEC item is yet another Post Effective Amendment to its N-2 Prospectus relating to the aforesaid Convertible issue. We do glance over these filings just in case, but there’s nothing new provided that would be of use to even the most detail obsessed investor. Instead, our main focus has been on Capitala Finance (CPTA) which announced upcoming earnings and for which the BDC Reporter supplies a brief list of issues that shareholders may want to look out for. We comment on a new distribution increase by Gladstone Investment and an earnings date from Gladstone Capital, adding a word of caution. Plus miscellaneous items regarding Alcentra Capital and Hercules Capital.
Capitala Finance (CPTA): Scheduled IQ 2017 earnings release
CPTA “will report its first quarter 2017 financial results on Monday, May 8, 2017 after the close of the financial markets.Management will host a conference call to discuss the operating and financial results at 8:30 a.m. EDT on Tuesday, May 9, 2017. To participate in the conference call, please dial (877) 312-5507 approximately 10 minutes prior to the call. International callers should dial (253) 237-1134. Please reference conference ID #97188012.A live webcast of the conference call will be available at http://investor.CapitalaGroup.com. Please access the website 15 minutes prior to the start of the call to download and install any necessary audio software. An archived replay of the conference will also be available in the investor relations section of the Company’s website”.
Here are a few “cheat sheet” items should be looking out for from CPTA:
1. Credit Quality: 2016 was a difficult year for the high yield BDC with Net Realized Loss on investments of ($22.8mn) and 10 of the 53 companies in portfolio on the BDC Reporter’s Watch List at year end. Included in the tally are 3 companies on non accrual status. Investors will want a status update on the non-accrual companies (American Exteriors, Sierra Hamilton and On Site Fuel Services). Keep an eye too even on performing names like Bluestem Brands (Retailer), Burgaflex Holdings, LLC (paying default interest in IVQ) and CSM Bakery Solutions (new to our Watch List in IVQ 2016 and with a cost of $11.8mn), amongst others.
2. Internal Investment Rating: Another way to get a snapshot of credit quality is to see what is happening in CPTA’s own “internal investment rating system”. At the end of 2015, $65mn of investments were under-performing (Categories 3-5). By September 2016, the number was up to $117mn and $143mn at year end 2016. Whatever the “happy talk” in the press release and on the Conference Call, investors should have a look at how the BDC’s own Watch List stands, especially the Category 4 and 5 values. Look in the 10-Q.
3. Earnings quality: As a lender whose loans are typically yielding in the low teens, CPTA typically has a high proportion of PIK income. However, the percentage of non-cash income booked was especially high in the IVQ 2016, apparently due to a restructured investment being paid with PIK. Worth determining if that increasing trend in non-cash income (which averaged 1.5% of the 13.2% yield in 2016, excluding non accrual loans) has reversed itself.
4. SBIC license: CPTA, like so many BDCs is managed by an Investment Advisor who is an asset manager with fingers in many pies. As a result in 2016 a new private Fund was launched which grabbed some of the SBIC license allocation available to the Capitala Group. With the BDC tapping out on leverage, access to more SBIC debentures is important. Apparently CPTA is back in the SBA’s queue, waiting word on an increase in its own SBIC borrowing capacity. An update on where that stands will be important.
Gladstone Investment (GAIN): Announced Increase In Monthly Distributions and Special Distribution.
Lower middle market debt and equity focused GAIN is swimming against the BDC trend and increasing its monthly distribution, albeit modestly. Furthermore, GAIN is beginning a new annual tradition- if there is excess Taxable Income – of making a Special Distribution to shareholders. The first one is $0.06 a share. In addition, the press release spells out the monthly distributions on GAIN’s Preferred, which is unchanged.
A reader questioned aloud how GAIN could be increasing its distribution to $0.192 per quarter whilst the last reported Net Investment Income Per Share for the IVQ 2017 was $0.17. The press release gives no clues, but the BDC Reporter notes that over 2016 the balance of Net Investment Income in excess of distributions was growing by over $1mn, to reach $7.509mn. Moreover, there can be a sizeable gap between reported GAAP income and Taxable Income, with the latter at a higher level, that might have precipitated the move. The IRS allows a BDC to hold onto excess earnings only for a year before being required to make the pay out, so this move by GAIN may just be a matter of necessity. Finally, the BDC- after a successful 2016 overall from a Realized Gain point of view- is relatively under-invested, which might have caused the Investment Advisor to project out higher income in the quarters ahead. David Gladstone is a master of setting and holding to a shareholder-friendly distribution level (except during the Force Majeure days of the Great Recession), so we expect this increase to stick, barring a major set-back in the business.
Gladstone Capital (GLAD): Announced Monthly Distributions and Earnings Release Date.
Sister BDC to GAIN (see above) GLAD also announced its next round of monthly distributions. No increase here in the $0.84 a year pay-out. Earnings will be released after the close on May 3, 2017.
The BDC Reporter points out that the stock price has been riding very high in recent months, essentially doubling since January of last year when a crisis of confidence in the BDC brought the price to a record low level. Yet now GLAD is trading at a substantial premium to par ($8.36), despite booking both Realized and Unrealized Losses in the fourth quarter of 2016. Frankly, the BDC Reporter is surprised about the sudden popularity of this long standing BDC. When we reviewed the portfolio, we identified a host of problematic companies (17 out of 44) and a number of investments bearing interest rates that did not seem sustainable for long periods. Shareholders may want to keep an eye out for the earnings release to ensure they’re not surprised by any credit deterioration, which might affect the stock price in a very brief period.
Hercules Capital (HTGC): Filed multiple Form 4s: Statement Of Changes in Beneficial Ownership of Securities.
5 different insiders at technology-focused HTGC have been selling shares, as reported above. Given that HTGC is an “internally managed” BDC, certain officers and Directors receive grants of stock as part of their compensation and are allowed to sell a portion to pay their ensuing tax liability here. For snoopy investors- like the BDC Reporter- the Form 4 is also useful in determining how much each insider owns of the BDC after these sales have occurred. No great surprise that the biggest shareholder in this group seems to be Manuel Henriquez, HTGC’s Chairman and CEO.
Alcentra Capital (ABDC): Initiated at Market Perform at Keefe Bruyette & Woods.
The oft-quoted KBW set a price target of $14.0 for ABDC, which is currently trading towards a two year high just below that level. Frankly, the BDC Reporter does not understand most analyst ratings or how investors are supposed to use them because we undertake our own research. We’re focused less on the price (what are you supposed to do if ABDC reaches $14.0 ?) but on the long term sustainability of any BDC’s earnings. We rate every public BDC we track between A and F (no E), reflecting our view of what we expect will happen to the distribution level and NAV in the years ahead. An A rating is reserved for securities expected to remain unchanged, or even increase, in the years ahead. Most of our A rated investments are BDC Baby Bonds. A B rating means we anticipate-over time and happening in fits and starts- a 2% annual decline in recurring earnings. C means a 4% annual decline. D a 6% annual decline and F is anything higher.
Anyway, ABDC has performed pretty well since going public and has managed to maintain its distribution unchanged since its $15.0 a share IPO in May 2014. Nonetheless, given the risk profile of the BDC, our rating for ABDC is a C. Or in other words we expect credit losses to erode earnings power over the next several years. Five years from now we expect-especially if there’s been a recession in the interim- that earnings, NAV and the distribution will be 20% lower than today. Currently ABDC trades at a 1% premium to book value.