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BDC News Of The Day: April 25, 2017

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Here are the main news items and SEC filings from all the publicly traded and non-traded BDCs that the BDC Reporter tracks for Tuesday April 25, 2017 as of  1:00 p.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. Where appropriate, we add brief comments. Multiple filings and several press releases to review on the day. Most notably, MVC Capital (MVC) announced a complex pretzel of a transaction; Ares Capital (ARCC) and BlackRock Capital (BKCC) nudged their shareholders; PennantPark (PNNT) filed a preliminary Prospectus, notwithstanding a troubled portfolio; Monroe Capital (MRCC) and CM Finance (CMFN) announced earnings release dates and Triangle Capital (TCAP) touted a new investment.

 

 

 

 

 

SEC FILINGS

 

MVC Capital (MVC) :  Filed Form 8-K : Entry Into A Material Definitive Agreement And Filed Form 425.

MVC is in the midst of engineering a highly complex, and potentially controversial, merger, whose broad outline is spelled out in the two filings listed above. Essentially, MVC is merging two very different companies which the equity-oriented BDC controls into a new public company with a new name, new business new ownership and new Board.  All of that will be accomplished by a series of corporate actions, governmental approvals and Board decisions in the next four months. What we cannot yet determine through the fog of legalese and the multiple steps involved in getting from A to Z is who will be the principal beneficiaries of the transaction, and how MVC’s shareholders (who have nothing to say from a legal standpoint as far as we can tell) might fare.

The two companies being merged cannot be more different. The first is USG&E, a national retail energy supplier, and MVC’s largest portfolio company holding by far, representing about a third of investment assets at fair market value. At January 31, 2017 USG&E investments were valued at $100mn on an MVC portfolio of $380mn. The second company is Equus Total Return (Equus) , formerly a publicly traded Business Development Company. MVC owns 33% of Equus. The back stories of when and how MVC acquired controlling interests in both companies could fill a book. Suffice to say for our purposes is that MVC’s principals are at the levers of both companies.

In a first stage USG&E will be sold to Equus, or more precisely 90% of the stock of the energy retail supplier. In a second step, the 10% remaining shareholders of USG&E will be given shares in Equus instead, on the same terms as the initial 90% holders. As a legal entity USG&E will be extinguished.

Equus will pay USG&E for the acquisition of its business with the issuance of new common shares and convertible Preferred stock, 75% of which will be received by MVC.

Then Equus will change its name, just to confuse our readers and ourselves, to USG&E Inc. and will trade as public company focused on energy retailing. Some of the other investments that Equus currently owns will be sold off. MVC will appoint the majority of Board members to the renamed public company which we knew as Equus Total Return, but is now called USG&E Inc. If a long list of pre-requisites can be accomplished, including arranging financing to repay some Preferred obligations of the current USG&E; approval by the Federal Energy Regulatory Commission; approval of the new stock issue by the New York Stock Exchange; the resignation of “certain current board members of Equus” and much more.

However, there does not seem that any provision is required for approval of any of the transactions contemplated above by the shareholders of the two Business Development Companies involved: MVC Capital and Equus Total Return. Furthermore, the filings made available to date still leave outsiders (including MVC’s shareholders) still very much in the dark about the value of USG&E’s energy business, and about who is getting what in order for this transaction to be completed. We refer shareholders of MVC to this artfully worded disclaimer at the bottom of the filing, which warns readers that there is much more that needs to be known, but the parties involved may not readily make the information available.  Please read carefully:

The Merger Agreement has been filed to provide investors and security holders with information regarding its terms. It is not intended to provide any other factual information about MVC, USG&E, Equus or any of their respective subsidiaries or affiliates. The representations, warranties and covenants contained in the Merger Agreement (a) were made by the parties thereto only for purposes of that agreement and as of specific dates; (b) were made solely for the benefit of the parties to the Merger Agreement; (c) may be subject to limitations agreed upon by the contracting parties, including being qualified by confidential disclosures exchanged between the parties in connection with the execution of the Merger Agreement (such disclosures include information that has been included in public disclosures, as well as additional non-public information); (d) may have been made for the purposes of allocating contractual risk among the parties to the Merger Agreement instead of establishing these matters as facts; and (e) may be subject to standards of materiality applicable to the contracting parties that differ from those applicable to investors. Investors should not rely on the representations, warranties and covenants or any descriptions thereof as characterizations of the actual state of facts or condition of MVC, USG&E, Equus or any of their respective subsidiaries or affiliates. Additionally, the representations, warranties, covenants, conditions and other terms of the Merger Agreement may be subject to subsequent waiver or modification. Moreover, information concerning the subject matter of the representations, warranties and covenants may change after the date of the Merger Agreement, which subsequent information may or may not be fully reflected in MVC’s public disclosures. The Merger Agreement should not be read alone, but should instead be read in conjunction with the other information regarding MVC that is or will be contained in, or incorporated by reference into, the Forms 10-K, Forms 10-Q and other documents that are filed with the SEC.
Of course, MVC’s shareholders will be asking themselves still after reading all the above: is this a good deal for me ? The BDC Reporter’s answer is that there is no way to tell because there are so many gaps in the narrative. We wonder most about what the financial performance of USG&E looks like (most of the assets held by Equus are in the form of cash and a tantalizingly large Net Operating Loss). We know from MVC’s latest 10-Q filing that the portfolio company is paying a portion of the interest owed on an unsecured loan to the BDC in PIK, rather than cash. We know MVC’s  Preferred Stock  in USG&E is pledged to a senior creditor (Macquarie Energy), and appears that the repayment of the Australian firm may be a necessary pre-condition of this transaction. We know that USG&E’s distributions to MVC are episodic.  We believe that the current valuation of the energy company has been prepared by MVC’s managers and reviewed by the independent Board members, but not by a third party valuation firm. We know MVC will be subject to a lock-up for the first year in regards to its shares held in the new USG&E, which will hinder the liquidity of the investment. However, we do not know enough to offer up a reasoned and comprehensive conclusion.
 
Ares Capital (ARCC): Filed Schedule 14 A.
 
ARCC filed a copy of the nagging missive sent out to shareholders reminding them to vote their shares for the Special Shareholders Meeting scheduled May 22, 2017. As is often the case in BDC-land, shareholders -who are mostly asked to nod to the Investment Advisor’s requests- as transmitted by the Board – must have been slow in voting on the issues in ARCC’s Proxy. In this case, the largest BDC is asking shareholders to approve the potential issue of additional shares at a price below Net Asset Value (but no more than 25% of the current shares outstanding of
426mn !), if deemed necessary. Given that ARCC’s stock price is trading well above Net Asset Value and the External Manager has a good track record of not surprising shareholders with bargain basement equity raises (spelled out by itself on page 7 of the Proxy), many shareholders may not have felt much urgency to vote on  proposal that is likely to be academic.
 
By the way, the BDC Reporter should point out (given that we’ve been updating readers about the situation at other BDCs) that the 9 insiders at ARCC, which includes its top officers and directors-both independent and otherwise- own way less as a group than 1% of the common stock.  Unfortunately for investors who like to conflate the performance of a stock with substantial insider ownership, no such link is possible here. ARCC has performed very well over the years for its shareholders while having only a modest shareholding by its stewards. MVC Capital, whose historical performance is at best mixed, has insider ownership of 12%.  Food for thought…
BlackRock Capital Investment (BKCC) : Filed Schedule 14A.
 
On the very same day as ARCC, BKCC too asked shareholders to get going and vote on a similar request to sell equity below Net Asset Value. (The insiders at BKCC own 1.3% of the BDC, if you were wondering). The BDC Reporter would be a little more anxious that the under-performing BDC – staffed with a new CEO, strategy and a giant asset management parent itching to make some headway in the public BDC arena – might convince itself that a below book equity raising would be a Good Idea. The stock is trading at $7.34, and the latest NAV is $8.21.  That’s quite a gap, but there’s the possibility that could narrow for the wrong reason. BKCC still has a number of troubled investments and NAV could drop further. It’s a remote possibility, but BKCC shareholders -should they they get round to voting the proposal through – may wake up sometime in the year ahead to a new equity offering at something below Net Asset Value.
 
PennantPark Investment (PNNT): Filed Preliminary Form N-2- Prospectus.
 
Another BDC that’s had a hard time of late, PNNT filed a preliminary Prospectus for the potential raise of up to $750mn.  Besides the amount of the potential capital raise (which could as readily be debt as equity or that artful compromise: a Convertible), the rest of the document is just a rehash of the BDC’s year end filing, which is nearly 4 months old at this point.  We’d suggest shareholders await the next earnings report and see if PNNT has been able to put its troubles behind it. The BDC has seen its NAV Per Share drop from $11.03 at the end of fiscal 2014 (September) to $9.11 and the first dividend cut in its history, from $0.28 a quarter to $0.18.  The BDC made a major cut in its pay-out in the hopes that would be more than enough to ensure a return to dividend stability. However, even in the last quarter PNNT still has Unrealized Depreciation on its portfolio assets of ($75mn), or more than 5% of the value of the investments at cost. Furthermore, a good portion of the portfolio consists of restructured companies from the energy sector and other sectors whose ultimate success is far from assured. The recent slippage in the price of oil should remind investors that success in the oil patch is always tenuous, and the very success of oil explorers and producers is what is likely to cause a later reversal in their fortunes.
 
As a result, much of PNNT’s earnings quality remains questionable. In FY 2016, Pay-In-Kind income has increased by 50% over the level of two years before things started falling apart. More than 10% of investment income and 20% of Net Investment Income was in non-cash form, mostly derived from these restructured companies. What happens at a handful of portfolio companies in the quarters ahead will make all the difference to the BDC’s future. We suggest readers keep an eye on RAM Energy (Cost: $107mn; FMV: $70mn); Superior Digital Displays ($44mn/$33mn); ETX Energy ($36mn/$46mn) , U.S. Well Services ($15mn/$13mn) and the various Affinion companies ($67mn/$60mn). The aggregate fair market value of these 5 companies on PNNT’s books is equal to about 40% of its net book value. 4 of the 5 are paying interest only in PIK and the fifth one (Affinion) may go that way shortly, as we discussed in the BDC Credit Reporter on April 22, 2017.  PNNT’s future will depend largely on how the corporate destiny in the months ahead of this handful of companies.  Everything else is a sideshow, even though we do have concerns about how PNNT is making some very big bets on a few other companies, which are currently performing fine. Have a look at PrePaid Legal Services ($62mn FMV), Jacobs Entertainment ($51mn FMV and a loan paying a yield of 13.0%) and Parq Holdings ($77mn and also at 13.0%) . Together these 3 companies have a value equal to a third of PNNT’s net book value. Did we mention all 3 are Second Lien ? Put the two groups together and the 8 companies (5 of which may all end up paying income only in PIK, and two at an onerous 13.0% rate) value is equal to nearly three-quarters of PNNT’s capital.
 
In BDC investing, it’s all about playing the odds. In this case, the experienced and resilient team at PennantPark may steer all or most these companies to safety. Investors, though, will have to decide if the risk that they will not is worth receiving a 9.0% yield at the current market price.  If PNNT does fully succeed that dividend (and stock price) could go higher. If they don’t succeed, there’s a long drop ahead.
 
 
 
PRESS RELEASES
 
Two BDCs announced IQ 2017 earnings  release dates: Monroe Capital (MRCC) on May 9th after the close and CM Finance (CMFN) on May 10th , also after the markets close. The BDC Credit Reporter is particularly intrigued to see if CMFN’s portfolio troubles, which seemed on the mend last time we checked, continues. MRCC has kept to the straight and narrow, but we’ll be having a look any way.
 
Triangle Capital (TCAP) : Announced An Investment In Tosca Services, LLC.
 
TCAP issued a press release about a new investment in a company whose business is to provide “reusable plastic containers and logistics services to companies operating in the perishable food supply chain”. We know the investment was for $29.7mn and is in senior debt. No other details were made available. Of course, as the BDC Reporter has whined before this type of release tells shareholders next to nothing except that TCAP is making loans, which we pretty much assumed they were doing even without benefit of this press release.
 
 
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