BDC News Of The Day: April 6, 2017
Here are the main news items and SEC filings from all the publicly traded BDCs that we track for Thursday April 6, 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. Where appropriate, we add brief comments. Another active day, with yet more capital being raised (Prospect Capital). We cover that development almost in real time, but there are other items worth noting, not all of which get the same attention, and some which the BDCs involved would rather stay buried in their filings.
PRESS RELEASE + SEC FILING
Prospect Capital (PSEC): Announces offering of Unsecured Convertible Note 2022.
PSEC has raised $225mn in a public Convertible Note offering, the proceeds of which will be used to repay two Convertible debt issues already on the books before their maturity, and the remainder invested in marketable securities. At the open on April 6th, PSEC announced that the yield on the Convertible had been fixed at 4.95%, and the conversion price at a 10% premium to the current price or $9.98. Unlike Baby Bonds, the Convertible is not redeemable by the BDC till 2022. See the Pricing Term Sheet.
S&P -not waiting for the conclusion of the transaction- has rated the new issue BBB-, according to a press release on Alpha Sense. The BDC Reporter points out that PSEC- unlike some other BDCs who’ve placed Convertibles in the past year- has gone to the public rather than the institutional market. Not surprising given the popularity of PSEC with retail investors and the very low institutional ownership of the BDC. Even S&P on granting its investment grade rating to the new Convertible reiterated PSEC’s “negative outlook” but left the door open for an upgrade too. Here’s the full quote:
“Our negative outlook on PSEC reflects our expectation that we could downgrade the company over the next 18-24 months if its debt to equity rises to more than 0.85x or its asset coverage ratio declines below 220%, and if we expect the company to sustain these levels over several quarters. We could also lower the ratings if we observe a material increase in portfolio risk or portfolio deterioration. This could include a significant rise in non accruals and unrealized and realized losses that could result in the realized return on average portfolio investments decreasing below 5% or non-deal-dependent income coverage of both interest and dividends decreasing below 1x. S&P Global Ratings could revise its outlook to stable if PSEC significantly reduces leverage, bringing its debt to ATE below 1x, and reduces risk in its investment portfolio”.
The interest rate achieved by PSEC for “5 year money” is pretty good, and should modestly reduce interest expense given that the two Convertibles being refinanced were at higher rates, but the cost of the transaction ($7,250,000) will eat into the savings in the short term. If converted into equity, the price is slightly above the current NAV of $9.62. The BDC Reporter projects out NAV erosion over the long term for every public BDC. We project the controversial company will see NAV drop by 30%-40% by 2022, so the likelihood of this instrument converting into shares seems very low. However, if we are wrong, the Convertible should earn earn 5% a year interest, plus a premium of 10% (or 2% a year) or more to investors. As a debt instrument, with very little debt senior to the Convertible (but plenty of borrowings on a pari passu basis), the Convertible seems very safe. However, potential buyers should take into account that the BDC is still under SEC investigation (that sounds worse than what is probably going on: a review of whether the BDC has used appropriate accounting). The Investment Advisor of the BDC has a history of pushing the envelope on accounting and valuation issues (which necessitated a complete re-do of all financial statements a few years ago) and is taking big bets on Controlled investments in which PSEC is the controlling shareholder and (sometimes) sole lender which pay very, very high yields but may trip them up in the future. On the other hand, as with this Convertible, the Investment Advisor has gone to great lengths not to rely on institutional lenders for most of its debt capital, avoiding covenants and potential defaults down the road. Even if very high credit losses should occur as long as PSEC is able to pay its bills and services its debt there is little reliance on outside lenders. At year end 2016 the Company had $2.5bn in debt, but zero outstandings under its Revolver. The latest Convertible debt capital raise only strengthens the ability of the BDC to avoid triggering any covenants whatever happens to the performance of its portfolio.
TCP Capital Corp. (TCPC): Announces earnings release for the IQ 2017.
TCPC will report its financial results for the first quarter ended March 31, 2017 on Tuesday, May 9, 2017, prior to the opening of the financial markets and will host a conference call at 1:00 p.m. Eastern Time (10:00 a.m. Pacific Time) on Tuesday, May 9, 2017 to discuss its financial results.
INSIDER PURCHASES AND SALES
Main Street Capital (MAIN): Filed multiple Form 4s: Statement of Change In Beneficial Ownership Of Securities
MAIN is an internally managed BDC (a format which many BDC investors profess to prefer over externally managed). As a result, the managers and officers receive stock ownership in the BDC. With tax season upon us, the individuals involved are receiving their annual allocations and shares are being sold to pay taxes. There are 8 different individuals involved so we’ve provided a link in the heading to the BDC’s SEC filing page, and readers can click in from there on all or some of the Form 4 filings, which provide the name, title, role of each MAIN individual, as well as shares received and shares sold and the balance of shares owned. The BDC Reporter added up-in a rough and ready way-and calculated that the total shares owned by the Main Eight exceeds 2.5mn, or just under 5% of total shares outstanding. For more comprehensive insider ownership-essentially all by grant from the BDC and dilutive to shareholders- see the latest Proxy filing. That shows total insider ownership (as defined by the SEC and including the independent directors) at 5.58% of total shares outstanding.
Stellus Capital Investment Corporation (SCM): Filed a Post Effective Amendment to Form N-2.
As the BDC Reporter mentioned yesterday, SCM has just issued new common shares in a secondary offering. The documents in this filing are typically the not very important (as the filing itself says) post closing documentation. However, we could not help ourselves and had a quick read. We discovered that the latest equity raise cost SCM’s shareholders $517,680. The biggest single expense was the advice of counsel at $200,000. (That’s still an estimate so SCM should be checking its mail for some heavy billing envelopes as all the hours are totted up). We also read the Underwriting Agreement between SCM , its Investment Advisor and the institutions involved in the capital raise, which mostly involved representations and warranties by both sides and standard exculpatory language. There are opinion letters on all sides, which add to the cost as our own experience has taught us over the years. We did note Section 15, which very explicitly reaffirmed that the underwriters of the stock have analysts who might comment on the performance of the BDC or the Advisor that might differ from the views of the investment bankers in the firms involved. The BDC and the Advisor explicitly agreed not to get mad if and when the research analyst said hurtful things, even as the same institution booked a huge investment banking fee.
“The Company and the Advisor hereby waive and release, to the fullest extent permitted by law, any claims that it may have against the Underwriters with respect to any conflict of interest that may arise from the fact that the views expressed by the Underwriters’ independent research analysts and research departments may be different from or inconsistent with the views or advice communicated to the Company and/or the Advisor by any Underwriter’s investment banking division”.
Of course the BDC Reporter and our readers know all this about the Chinese Walls at investment banks, but it’s worth seeing in black and white once in a while. How things work in real life we do not know.
The underwriters also get the BDC and the Advisor to agree that they will have no recourse if their investment bankers end up shorting the very same securities that they brought to market. Here is the language:
“The Company and the Advisor acknowledge that each of the Underwriters is a full service securities firm and as such, from time to time, subject to applicable securities laws, may effect transactions for its own account or the account of its customers and hold long or short positions in debt or equity securities of the companies that are the subject of the transactions contemplated by this Agreement”.
Fifth Street Finance (FSC) and Fifth Street Senior Floating Rate (FSFR): Filed Form 8-K appointing Bernard D. Berman as Chief Executive Officer.
Yesterday, the BDC Reporter and every other publication out there reported on the departure of Patrick Dalton as CEO of both FSC and FSFR, and his withdrawal from their respective Boards. The press releases issued on the day mentioned that Bernard D. Berman would be Mr Dalton’s replacement. Of course, there were no details as whether this was a permanent or temporary arrangement and has fueled speculation as to what happens next at FSC, FSFR and Investment Advisor Fifth Street Asset Management (FSAM).
This filing just provides a brief backgrounder on Mr Berman, much of which is well known given that he’s been involved with the BDCs involved since inception. Here is the information for those seeking a refresher about the gentleman wearing the most hats in BDC-land right now:
“Mr. Berman, 46, has been a member of the Company’s Board of Directors since February 2009 and the Chairman of the Company’s Board of Directors since September 2014. He was also the Company’s president from February 2010 to September 2014, secretary from October 2007 to September 2014, and chief compliance officer from April 2009 to May 2013. Mr. Berman has also served as a director of FSFR since May 2013 and as Chairman of its board of directors since January 2014. Mr. Berman also served as president of FSFR from May 2013 to January 2014. From September 2014 until his resignation in June 2015, Mr. Berman served on the board of directors of Fifth Street Asset Management Inc. (“FSAM”), the publicly traded asset manager that indirectly owns Fifth Street Management, LLC (“Fifth Street Management”), the Company’s investment adviser. Mr. Berman also serves as the co-president and chief compliance officer of FSAM. Mr. Berman also serves as the president of Fifth Street Management and serves on its executive committee. Prior to joining the group of affiliated companies including the Company’s investment adviser in 2004, Mr. Berman was a corporate attorney from 1995 to 2004, during which time he negotiated and structured a variety of investment transactions. Mr. Berman received a J.D. from Boston College Law School and a B.S. in Finance from Lehigh University.
There are no arrangements or understandings between Mr. Berman and any other persons pursuant to which he was selected as an officer. There are no current or proposed transactions between the Company and Mr. Berman or his immediate family members that would require disclosure under Item 404(a) of Regulation S-K promulgated by the Securities and Exchange Commission”.