BDC News Of The Day: April 4, 2017
Here are the main news items and SEC filings from all the publicly traded BDCs that we track for Tuesday April 4, 2017 at 11:00 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. Where appropriate, we add brief comments. This was a heavy news day with two public offerings underway, two waiting in the sidelines, earnings releases scheduled and a preview of IQ 2017 results. We’ve left out a couple of minor developments: Capitala Finance’s distribution announcement, which was routine and unchanged and a new portfolio investment by Horizon Technology Finance. In any case, the latter was just a promotional press release as very little useful information was relayed to investors such as the terms of the loan, the maturity or the structure involved.
The $1.6bn BDC has undertaken another secondary stock offering less than 6 months after coming to market last time, and has achieved a higher price: $14.60 versus $13.50. Last time, with the offering priced close to Net Asset Value, the External Manager subsidized some of the offering costs. This time, there’s no word of any subsidy, as the offering price is over a $1 greater than Net Asset Value Per Share at 12-31-2016. Does NMFC “need” the capital ? Well, at year end 2016 its statutory debt to equity was 0.63x, well below the 0.8x level or higher NMFC normally park itself in. However, both in the final quarter and the first weeks of 2017 net deal activity was running on at an above average pace and the SBA was flashing its “Green Light” at the BDC, promising a potential new SBIC license, and the concomitant need for new equity capital before accessing the incremental 10 year debentures. (How often can we say that’s the best deal available in the leveraged finance markets today, with the interest rate payable through 2027 lower than many smaller BDCs would pay for a one year Revolver ?).
The only dark cloud the BDC Reporter would mention are the inevitable-but not inconsequential-credit stumbles NMFC has taken in the past 2 years are several earlier years of appearing invulnerable from credit underwriting standpoint. Realized Losses have totaled ($30mn) in the past twenty four months. The losses equal 3.3% of NMFC’s capital at par before the prior equity raise. Nor is the pain necessarily over: according to NMFC’s own press release at the end of 2016 (the BDC is very forthright about credit issues which they say is their largest emphasis) there was a new non-accrual on the books in the last quarter (Sierra Hamilton) and a total Watch List of 4 companies with a total cost just under $40mn and a value just under $10mn. However, the BDC Credit Reporter’s own Watch List evaluation has 10 names, which means we’ll be having to take a deeper look shortly. For a very high level and preliminary update on NMFC’s recent financial performance, see Other Filings below.
TICC Capital (TICC): Announces offering of public Notes
TICC will be issuing publicly registered Baby Bonds in order to use the proceeds to repay its 7.50% Convertible Bonds, which are coming due later in the year. National Securities Corporation-joint lead on the offering-has set an initial size of $50mn , but is hoping to upsize and a target pricing of 6.5% per annum, with a maturity of 2024, and a 3 year “No Call”. If achieved-and we have no doubt the Baby Bonds will get placed-this will be a big step forward for TICC, which has been shrinking in size for several quarters, and whose Investment Advisor has spent most of the past 2 years first trying to sell off its management contract, then repelling “activist” shareholders and wanna-be External Managers, while its shareholders have faced a sharply declining Net Asset Value Per Share and a big drop in the distrubtion. Those metrics are unlikely to improve, but paying off the Convertible with a Baby Bond will stabilize the BDC’s longer term capital base.
The key item to look for is how much capital TICC is able to raise. If the Baby Bond proceeds fall far short of the Convertible balance, more assets will have to be sold off. On the other hand, if the bond offering gets upsized as a hungry-for-yield Baby Bond audience clamors for paper, TICC (and its underwriters) will be delighted. The BDC Reporter, though, reserves judgement as to whether the new Baby Bond will be as “safe” from a credit standpoint as the 35 or so similar securities already in the market, and able to withstand the “Stress Test” we put each issue through, which includes tests such as assuming all loan portfolio assets will be written down by 20% (or sometimes 30%) in a Worst Case.
TICC Capital: 8-K disclosure re: asset sales.
As mentioned above, TICC has been shrinking in size for several quarters. Back in December 2015, when TICC still had $924mn in investment assets on its books, the BDC Reporter wrote a tome for Seeking Alpha which included a prediction that the BDC would need to sharply reduce its balance sheet size to remain in business. We projected TICC would be at $700mn by year end-2015 and $620mn thereafter. That would represent a drop of a third in the total value of the portfolio in a few quarters, which seemed worth noting. In fact, we were too conservative. TICC’s investment assets dropped to $657mn at the end of 2015, and reached $590mn as of the latest quarterly filing at December 31 2016. Don’t forget that CLO assets bounced back in value substantially over the period. If that hadn’t happened TICC’s assets at year end 2016 might have been closer to $550mn, and nearly 40% lower than just 5 quarters before.
Our point at the time was that the mix of the Investment Advisor, desperately seeking to retain control, and the impact of BDC regulations regarding maximum leverage allowable and the high volatility involved in CLO investments, were all conspiring to force TICC to have to “shrink or die”. A process had been engaged in 2015 which would take several quarters to run its course, which is what has happened even though the Investment Advisor in a series of great mano-a-mano battles with other huge asset managers has remained King Of The Mountain, and caused both TPG Specialty and Benefit Street Partners to retreat. (Admittedly all the legal costs associated with these victories were paid for by TICC’s shareholders, which almost voted their Investment Advisor off the island).
All of this as preamble to the 8-K filing referenced above which shows that early in 2017, TICC’s investment portfolio continued to shrink by $86mn net (or 14% of the year end total), with some of the proceeds being used to further repay the BDC’s only inexpensive source 0f financing: its on balance CLO financing.
EARNINGS RELEASES: IQ 2017
Apollo Investment Corporation (AINV): Earnings will be released “prior to the opening of the financial markets on Thursday, May 18, 2017.The Company will also host a conference call on Thursday, May 18, 2017 at 10:00 a.m. Eastern Time”.
BlackRock Investment Capital (BKCC): “Wednesday, May 3, 2017 after the close of the financial markets.BlackRock Capital Investment invites all interested persons to attend its webcast/teleconference at 10:00 a.m. (Eastern Time) on Thursday, May 4, 2017 to discuss its first quarter 2017 financial results”.
Both BDCs have changed management and business strategies very recently and both have suggested that the worst of their credit underwriting problems are behind them and clear(er) skies are ahead. The BDC Reporter remains unconvinced by both BDCs, but the markets are giving them the benefit of the doubt.
FS Investment Corporation (FSIC): Post Effective Amendment Number 4 to Form N-2
FSIC, one of the largest BDCss individually and collectively with its non-traded sister funds, has been working on its shelf registration, but has not yet officially come to market. The BDC Reporter would like to knowingly predict what FSIC is up to, but we are in the dark. Recent performance has been mediocre, a dividend cut has been hinted at and the Investment Advisor on the Conference Call has suggested the market conditions for issuing Baby Bonds were not ideal. Maybe conditions are changing-judging by TICC’s foray ? Or there’s something else afoot ? Or nothing ? (Like Boy Scouts, the better BDCs like to be always prepared with the paperwork filed and ready to go.
Stellus Capital Investment (SCM): Post Effective Amendment Number 1 to Form N-2.
SCM, too, has filed a Prospectus with the SEC, but this is only “amendment number 1”. Nominally, the BDC is looking to raise up to $200mn in debt or equity capital. Either is possible or both. Note that the stock is close to $14.50 and the latest NAV was $13.69. That’s a wonderful recovery for a BDC whose stock price was down at $8 a share within the past 2 years. Then there are the 6.5% 2019 Baby Bonds, whose non-redemption date is a year old. Even if there’s not much to be saved on the interest rate by refinancing, maybe the BDC would like to push out its maturity a few more years. “Take the money and run”. Seems like the obvious thing to do in both the case of the equity and the debt.
New Mountain Finance (NMFC): Form 8-K: Preliminary estimate of IQ 2017 NAV and EPS.
NMFC, besides raising new equity (see above), has been reassuring investors, through this 8-K filing, that an early calculation of the BDC’s Net Investment Income Per Share for the IQ 2017 period is running at $0.33-$0.34. That’s pretty much what one might have expected given the recent increase in the share count and the fast growth in total assets. (THe Investment Advisor deliberately seeks to maintain very stable recurring earnings per share and distributions, and has for years). The NAV Per Share estimate of $13.50 to $13.60 would be a slight improvement over $13.46 at the end of the IVQ 2016, and would suggest the problems in the Watch List (whether theirs or ours) have not materially impacted book value in recent weeks.