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BDC News Of The Day: Summary For May 11, 2017

Here is what is on the docket for May 11th, 2017, drawn from the summary of the 45 BDCs we track.

SOLAR CAPITAL: The SLRC repayment was already in the cards. Here is the press releaseThanks to a flattening yield curve, and the current “hot” market for BDC anything, SLRC – and a number of other “higher quality” BDCs are getting close to borrowing on an unsecured basis and for long periods (in this case 5 years) at the same interest rate as borrowing on a secured Revolver and for a shorter period and with a host of covenants. In the short run, shareholders pay a higher price and will probably see BDCs leverage themselves more than if only Revolver financing was available. (That’s good or bad depending on your perspective). However, having a large proportion of Unsecured Notes will be a clear-cut benefit during the Next Financial Crisis.  Banks lenders tend to dust off their Loan Agreements and talk tough with their BDC borrowers or even question why they are even in the lending business in the first place. (Deutsche Bank does this every few years). However, as long as quarterly interest payments are made, asset coverage remains over 200% everything can go on as before where Unsecured Notes and most Convertible Notes are concerned, both publicly and privately placed.  This will be a major factor in making the NextRecession different than the Great Recession for some in the BDC sector.

TCP CAPITAL &  PENNANT PARK FLOATING & PENNANT PARK INVESTMENT :  The BDC Reporter – in our attempt to be as comprehensive as possible -offers up to our readers these changes in analyst ratings on the three BDCs involved from Deutsche Bank and Ladenburg and JMP Securities. We never know what to make of these “calls”  but they do sometimes move markets for a period and are useful as a sentiment indicator. Of course there’s a lot of research that’s hiding behind the rating, and for clients of those firms, probably worth reading. Still, it’s a bold call by Deutsche on TCPC, with the BDC’s stock 2% off its near 3 year high, and trading at a premium to NAV.  At this price TCPC is trading at nearly 12x its distribution. As we said, we don’t understand analyst ratings.

The bigger story here -and impossible to fathom from 3 ratings changes – is whether there is a sea change happening amongst the small army of analysts who cover BDCs about future prospects. We’ve had a very big run-up in prices across the board. Moreover, earnings season has mostly thrown up lackluster results at even some of the top names (thinking of Ares Capital, Goldman Sachs BDC, Monroe Capital) and some worrying results (Prospect Capital, Fifth Street Finance). Will the professional analysts as a group turn more skeptical and start warning their investors to take profits or steer away entirely. If that should happen,  will the market follow ?  We’ve been noting quite a few cracks in BDC prices in the last couple of weeks. Now that earnings season is almost done, we may see a step down in BDC prices. That’s more likely than another step up, but the BDC Reporter has been wrong before with short term calls.

THL CREDIT INC. : This is the problem when huge asset management firms name all their various entities with similar names. It’s as if you had 3 boys and named them John, Jack and Jonathan. We’re pretty sure the “Best US CLO” has nothing to do with the public BDC with the ticker TCRD, but the machines are confused. This is just a reminder that the THL Credit organization has its fingers in many, many credit pies, including those very far away from the middle market mandate of the BDC. In fact, in the most recent Conference Call, the Investment Advisor made a big case for how TCRD is focused in the lower middle market; an entirely different segment than the portfolio components in the “Best US CLO”.