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American Capital Senior Floating: IQ 2017 Earnings

The BDC Reporter reviewed American Capital Senior Floating’s (ACSF) IQ 2017 earnings press release. We also read the transcript of the Conference Call, but there’s no public document yet available. Here’s our summary:

“Without yet reviewing the 10-Q, ACSF appears to have performed better than we would have expected in the first quarter. The increase in Net Investment Income Per Share, especially with Debt To Equity at a relatively modest (by ACSF standards) of 0.76x. was surprising, given the pressures on both regular loan spreads and CLO earnings (17% of portfolio). Taxable Income may yet be a different kettle of fish and come in lower. We won’t know for awhile.

Still, there was some weakness, with both a small net Realized loss and Unrealized Depreciation in the portfolio, even as credit asset values remained super-strong from a valuation standpoint. NAV was down as a result, despite retaining some earnings and the Goldilocks credit valuations out there.The key issue here is the future relationship between the BDC and its Ares Capital owned Advisor Ivy Hill. The specific issue is who is going to pay the BDC’s operating costs, which were subsidized under American Capital ownership. ARCC, which is being subsidized by its Investment Advisor to the tune of tens of millions of fee waivers, seems less willing to pay all ACSF’s bills for much longer. A shareholder vote on a new Investment Advisory Agreement will settle the subject shortly.  However, keeping costs low is a critical component of the BDC’s business model. If, and we’re not saying this will happen, Ivy Hill did not waive a portion of operating costs this quarter, Net Investment Income Per Share would have been closer to $0.27 than the $0.31, and below the distribution of $0.29. Worth watching what happens in the Proxies.The stock is trading up on the results today and about 3% off its high, and slightly below NAV. Still, expensive at 11.5x the distribution, or 8.7% yield for a BDC with little earnings upside; invested in a segment with rampant spread compression going on (a multi quarter process of getting squeezed) and an unsettled relationship with its Investment Advisor.