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BDC News Of The Day: May 17, 2017

A long list of BDC developments on May 16th and for May 17th (so far). We’ve covered just about every item in the table in the News Of The Day summary below. The exceptions are OHA Investment’s (OHAI) latest results, reviewed on a stand alone basis earlier in the day and Alcentra Capital’s (ABDC) just announced, completed and priced equity offerings, which we’ll review shortly.

       INSIDER TRANSACTIONS

Like yesterday, Prospect Capital (PSEC) CFO Brian Oswald bought new shares in the BDC: 4,453, and now owns 490,000. PSEC’s stock price has rallied since the low of $8.00 last Friday to as high as $8.23. Mr Oswald purchased this batch at $8.05.

Capital Southwest Corporation’s (CSWC) former Chairman of the Board, who has just stepped down from the role, sold 500 shares in the BDC pursuant to  10b 5-1 Plan, which automatically undertakes sales based on pre-determined thresholds. He continues to own 36,500 shares. CSWC’s stock price performed very well since splitting back in September 2015 into two and adopting a traditional BDC-As-Lender model. Here’s a chart from the re-launch of the BDC to March 31 2017, which shows the price increasing by 15%, reaching a high of $16.91. However, the stock price has been headed sharply downward in the last few weeks, reaching $15.30 currently, a 10% decrease. Mr Armes sold at $16.00 a share, suggesting the speed of the descent. Volume has been high in the past couple of days. NAV was last pegged at $17.88. The BDC is still in the process of deploying its capital so the running rate distribution is only $0.68, so the yield is only 4.4% even after a 10% price drop. However, CSWC did recently announced a $0.26 Special Dividend, generated from realized gains.

Medley Capital (MCC) saw renewed purchases by Medley Seed Funding LLC, an entity controlled by the BDC’s Investment Advisor Medley LLC and is part of a complex investment arrangement that includes Fortress Investment that we most recently discussed on May 12th, 2017. Medley See Funding has been buying constantly and as the BDC’s price has slumped since last summer from about $7.5 to just over $6 a share now, a drop of (16%). The price decrease has accelerated in recent days, but so have the purchases with nearly a quarter of a million shares bought at $6.1, and bringing the shares held by the LLC to 3,139,492. As far as we can tell the purchases have accounted for a goodly percentage of MCC’s daily volume of shares traded. For all the insider purchases by Medley Seed Funding, just go to MCC’s SEC filings and check out Form 4 filings between 2016 and today.

                  PROSPECTUS

New Mountain Finance (NMFC) filed a Shelf Offering prospectus, in preparation for up to $250,000,000 in capital raising.  The BDC has been busy over the years in the capital markets, but typically only in raising round after round of equity. The most recent iteration was a month ago at $14.60 a share. This latest Prospectus may just sit there on the proverbial shelf given another equity issue is unlikely so close to the last one, although the stock price has held up well. Or, NMFC may be planning a debt issue of some kind or a Convertible. Our track record in guessing what a BDC is going to do capital raising-wise and when is only 50/50, so we’ll duck any further prognostications.

                     PRESENTATIONS

MVC Capital (MVC) filed a presentation regarding the proposed merger transaction between its two captive subsidiaries Equus Total Return and U.S. Gas & Electric Inc. The BDC Reporter broke down the proposed transaction (which has been widely ignored by the financial press except this article on Seeking Alpha by Thomas Hughes on April 27). With this presentation, we know a little more about both how the deal will be structured and about U.S. Gas and Electric, which is the centerpiece of the deal. We called the transaction “financial engineering”, which appears to be borne out by the increase in MVC’s holdings from $89mn at the end of January to $115mn as per the presentation, after the completion.

Equus, as previously reported, will be selling off its existing investments after the close. The presentation spells out what the tiny BDC (owned by another BDC) owns: a handful of disparate investments reportedly valued at around $25mn, net of the stock of MVC itself they hold. See page 6.

All these developments at MVC have not done much to help its stock price in the last month. See chart.  Perhaps investors were already discounting the value of the two investments as the price of MVC has been on the rise since January 2016, but so has the BDC sector as a whole. Or maybe investors believe this is much ado about nothing and no material benefit will be incurred from all this time spent in lawyers offices ? The BDC Reporter – usually not short of opinions – has none in this case. There are too many moving parts and “known unknowns” (this presentation notwithstanding) to say anything with any certainty. So we will say nothing more.

Gladstone Capital (GLAD) also published a presentation, but only its IQ 2017 slide deck. A useful summary of the BDC’s business case and model for shareholders needing a refresher or potential new investors. GLAD is a survivor that’s been around since even before the BDC Reporter (what preceded the dinosaurs ?), coming first to market in 2002. Within the last two years managed to reach an all-time low of $4.71, only to explode upward and pass the $10 a share price recently in one of the most astounding turnabouts in a BDC sector with lots of competition in that category.

The BDC Reporter has mixed feelings. We had a very constructive discussion with President Bob Marcotte a few weeks ago, but the BDC Credit Reporter remains concerned about credit quality. We’ll be taking a “deep dive” in the next few days into the portfolio. Obviously the market is not worried given that the stock trades at around 12x recurring earnings and a 20% premium to book value. Yet in the IQ of 2016, the same market had a completely different view. Throughout both periods, GLAD’s quarterly Net Investment Income Per Share – as the presentation shows on page 17 – was $0.21. So curious…

            ANALYST RATINGS

Continuing a recent spate of rating announcements, Wunderlich Securities “Initiated” Triangle Capital (TCAP) as a Buy. The once high flying BDC’s stock has been going nowhere for the past year, as this chart shows. Through 2013 TCAP was a Super Stock, selling at a huge premium to NAV based on its then ability to invest successfully in higher risk transactions without incurring material credit losses and booking Realized Gains to boot. For a time, TCAP was like Main Street Capital (MAIN), beloved by shareholders and paying out a very large distribution. The stock price was $30, and the annual distribution at $2.36 all-in. Then a series of credit mis-steps took the BDC and many of its investors by surprise. Eventually the dividend was cut back to $1.80 a year, and the stock price bottomed out a few weeks ago at $17.02.  Does Wunderlich perceive some potential return to TCAP’s prior glories ? We don’t know the rationale, just the headline.