BDC News Of The Day: April 7, 2017
Here are the main news items and SEC filings from all the publicly traded BDCs that we track for Friday April 7, 2017 at 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. This has been the busiest day yet since we began our goal of bringing you all the BDC news that’s fit to print. We managed to get everything in except the specifics for the IQ 2017 earnings releases for PennantPark Investment, PennantPark Floating Rate and Triangle Capital.
Stellus Capital Investment Corporation (SCM): Filed Schedule 14 A: Definitive Proxy
SCM, which just raised new capital, filed its Annual Proxy. Notwithstanding the recently expanded share count, the BDC is asking shareholders for the right in the next year to issue more stock below Net Asset Value; an almost universal request from Business Development Companies in this cycle. Admittedly, the chances of SCM needing emergency funds through a below NAV stock issue, or that investment opportunities would be so compelling to require more capital raised at a discount are low. Regarding the latter, the BDC Reporter has been occasionally posting data sets noted in our wide readings in leveraged finance that underscore how competitive and unattractive new deal activity is from an earnings standpoint. 3 days ago we quoted from an article which pointed out that loans are getting refinanced at ever lower pricing, and at a pace not seen since 2013, and loan spreads (from another article) are 16% lower than a year ago. Some middle market loans are being made at margins over funding cost not seen since 2004. There’s much more of the same that you can find on our Twitter feed at #bdcreporter. Nonetheless, from the BDC Reporter’s standpoint (and we’re probably in the minority here and not saying what the Investment Advisors would like to hear), the existence of the ability to issue stock below NAV-if approved-could hurt the stock price down the road if we get a major reversal in market conditions and shareholders get nervous the BDC will use its free pass approved at a very different time and place. For the Investment Advisor the ability to raise capital at any time and under virtually any condition is obviously a plus, but shareholders may not be the beneficiaries, whatever the Proxy says.
The Proxy also involves voting on two directors of the “staggered” Board. SCM-like so many of its peers-has instituted corporate governance measures since inception intended to ensure continued control by its sponsoring asset management organization: Stellus Capital Management. As was the case on April 5th when we reviewed THL Credit’s (TCRD) Proxy, the asset manager does not have a 5% or greater direct ownership in the BDC. However, the CEO and the other “interested” Directors and officers do own about 3.6% of total shares outstanding before the latest offering. That’s neither very high or very low compared to its BDC peers that we’ve reviewed.
As always, the BDC Reporter does not have great faith that the “independent” directors will represent much of an obstacle to the ambitions of the Investment Advisor. Unlike TCRD, which is the exception to the rule, SCM has the Chief Executive of its Investment Advisor as its own CEO and Chairman of the Board. The BDC does not even have a lead independent director from the 4 non affiliated individuals. We want to be fair and offer up the Investment Advisor’s arguments in favor of this lop sided governance. This will do for virtually all BDCs in a similar situation, so we’ll just do this once:
“The Board does not have a lead independent director. We are aware of the potential conflicts that may arise when a non-independent director is Chairman of the Board, but believe these potential conflicts are offset by our strong corporate governance practices. Our corporate governance practices include regular meetings of the independent directors in executive session without the presence of interested directors and management, the establishment of an audit committee and a nominating and corporate governance committee, each of which is comprised solely of independent directors, and the appointment of a Chief Compliance Officer, with whom the independent directors meet without the presence of interested directors and other members of management, for administering our compliance policies and procedures. The Chairman of the Audit Committee or his designee preside over the executive sessions of our independent directors”.
We respectfully disagree. The nominating and corporate governance committees have almost nothing to do. The principal task is to identify potential new Board members but there’s been no change in the composition of the 4 outside directors since 2012. No wonder the committee met just once in 2016 ! Moreover, the Compensation Committee has very little to given that officers compensation is set by the Investment Advisor. The Committee met twice in 2016, to what end we are not sure. Only the audit committee appears to be busy with 5 meetings…
However a truly independent counter-balance to the Investment Advisor is important to SCM shareholders. Besides the risk of equity being raised inappropriately below NAV (if that provision is approved), there are more quotidian conflicts between the Investment Advisor and the BDC’s shareholders. With exemptive relief received from the BDC, the Proxy points out that the asset manager will be busy “with a private credit fund managed by Stellus Capital Management that has an investment strategy that is identical to our investment strategy”. The Investment Advisor had decided on an allocation policy between the public BDC and the private fund. The BDC Reporter continues to worry that with a dearth of good deals in the market, and independent Board members unaccustomed to standing up for the their shareholders, there is a real risk that the BDC is at risk of not receiving the full attention and deal flow of its Investment Advisor just when the need is greatest. (We refer you back in this regard to our opening discussion about deal activity in the leveraged market). Moreover, the independent directors have not negotiated any discount on management and incentive fees paid to the Investment Advisor despite the avowed non-full attention being paid to the BDC. Again, this is a universal theme by asset managers across the BDC space: providing only part time attention to their public BDCs while growing assets under management elsewhere in their organizations and without providing any offset to shareholders for what has become only one of multiple funds being tended to.
No wonder asset management organizations like Stellus Capital Management keep such control over their BDC’s corporate governance. This allows the Investment Advisor to have their cake and eat it too, without any demur from shareholders and its supposed representatives amongst “independent” Board members.
BlackRock Capital (BKCC): Filed Definitive Additional Materials To the Proxy.
BKCC sent out a missive starting with the amusing “Dear Fellow Stockholder”, to remind its shareholders to vote their shares for the May 5th Special Meeting of shareholders. The BDC Reporter reviewed BKCC’s Proxy in great detail a few weeks ago. To find out why we found the term “fellow stockholder” amusing, you’ll have to read our BKCC Proxy review.
Prospect Capital (PSEC): Kroll Bond Rating Agency Comments on Convertible Notes
Following PSEC’s successful Convertible Notes issuance and pricing, the rating agency-which maintains issuer and debt ratings of BBB+ on PSEC issued a press release. Kroll mentioned the new issue and its current ratings on the BDC and mentioned that in October 2016 the ratings were affirmed with a stable outlook. As is traditionally the case where rating agencies are concerned, Kroll summarized both the positive and negative features of PSEC: “The rating is further supported by Prospect’s proven management expertise in middle market lending. These strengths are balanced by the potential risks related to PSEC’s more volatile performance embedded in equity exposures within its buyout portfolio, collateralized loan obligation (CLO) investments, and slightly deteriorating asset quality”. Curiously enough, the press release ended with no further evaluation of the Convertible Notes or the impact of their issuance on its ratings.
Triangle Capital Corporation (TCAP): Filed Form N-2, Preliminary Prospectus.
The mid-market BDC filed a Prospectus in preliminary form for raising amounts up to $1 billion. We doubt TCAP is seeking to raise new equity, having come to market just a few weeks ago. However, a refinance of the TCAP Baby Bonds nominally due in December 2022, but which have passed their early redemption date (in 2015) is possible. The Baby Bonds have the ticker TCCA. (The other TCAP Baby Bond issue, with the ticker TCCB and also due in 2022,is not yet redeemable). By the way, for readers who want to undertake their BDC Baby Bond research, www.dividendyieldhunter.com is far and away the best website. However, there are other potential forms of capital raising TCAP could engage, or none.
Prospect Capital (PSEC): Filed Form N-2, Post Effective Amendment No 19.
PSEC files more documents than any other BDC. This was the nineteenth amendment to its Registration Statement. We noted the costs summarized which totaled $2,758,500. See page C30. We also note in passing the incredibly long list of Persons Controlled Or Under Common Control, which lists 4 pages plus of entities in which the BDC has a controlling ownership. PSEC is different from most of its peers in this regard, with a far higher proportion of entities in the Control column. That is part of its unique investment strategy, but also makes the BDC Reporter’s-and every other analyst out there-life harder in seeking to evaluate what they own and what it’s worth. See pages C-30-34.
Also included is the most recent term sheet for PSEC’s latest issue of Inter Notes, due 2022 (not the same as the Convertible), which bear a 5.0% yield, and began trading on April 3rd.
For readers who want to keep up with all the news at PSEC there’s a Recent Developments page included, which brings the list of new loans, repayments and such all the way up to March 31 2017. Nothing very exciting in there, but noted that Arctic Glacier repaid $150mn of debt to PSEC on March 20th. Even PSEC, with so many Control investments, has to contend with the red hot refinancing market.
Fifth Street Finance (FSC): Filed Form 4/A.
FSC filed the latest ownership numbers for Leonard Tannenbaum in the troubled BDC, which just lost its CEO and its way. The most recent form shows aggregate share ownership by Mr Tannenbaum- through various direct and indirect means-at nearly 25mn shares. Directly Mr Tannenbaum was listed as owning 15,246,743. That was close to a March 30 Form 4 filing which had Mr Tannenbaum’s direct holdings at 15,614,846.
By the way, FSC has reconvened its annual meeting to April 27, 2017. Worth placing in the calendar.
Solar Senior Capital (SUNS) : Dividend Announcement
In more prosaic news: SUNS “declared a distribution of $0.1175 per share for the month of April 2017. The distribution is payable on May 2, 2017 to stockholders of record as of April 20, 2017. The specific tax characteristics of the distribution will be reported to stockholders on Form 1099 after the end of the calendar year.” SUNS has now being paying an unchanged monthly distribution since September 2012.