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TICC Capital: Preliminary Proxy Filed UPDATED

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June 12, 2017: We have updated this earlier post with a copy of the final Proxy documents from TICC, which have just been filed.

May 30, 2017: On Friday May, 26, 2017 TICC Capital (TICC) filed a Preliminary Proxy with the SEC. We reviewed the document on Alpha-Sense, but have not been able to find the document yet on the BDC’s own website, even though we’ve linked to the SEC Filings page above.  Here are the highlights:

BAD TIMING ?

The BDC Reporter was interested to see the Proxy – even in draft form – given that TICC  had just announced that two directors have resigned from the Board. We were not sure what to make of the move at the time.

The two departures are of independent directors : Tonia Pankopf and G. Peter O’Brien, and both resignations occurred May 25th and are effective as of July 6.  As per the usual, no reasons were given for the resignations except that by stock exchange rule standards there was no “disagreement with the Company”. We note both directors had very long tenures with TICC as directors, dating back to 2003.

NOT HIGHLY INVESTED

We should also point out in passing that neither departing director was – literally – highly invested in the Company. Ms Pankopf – after 14 years of loyal service and many directors fees – had acquired only 15,937 shares of TICC and Mr O’Brien 66,510. In fact, most of the ownership of TICC is held – for what it’s worth – by the officers and insiders of the Investment Advisor. The 3 top insider owners hold 90% of the 3mn shares listed as owned by the total insider group in The Proxy. Overall TICC has about 51.5mn shares outstanding.

Obviously the departures were not scheduled far in advance as the Proxy has clearly been amended at the last minute to include the resignations, and to provide that the Board size – previously set at 7 members – would now be cut to 5. (The size had only been increased -apparently temporarily – to accommodate new directors in order to satisfy dissident shareholders. As we’ll see throughout this article, that was then and this is now).

GATEKEEPERS NEEDED

This may be an unfortunate time to lose the services of two “independent” directors given that the draft Proxy reveals that the SEC has almost approved a request by TICC to be allowed to invest alongside other funds managed by its External Manager. If no hearing is set by the SEC, the “exemptive relief” should be in place by June 14, 2017. Here is how TICC’s Proxy discusses how potential conflicts of interest between sister funds are handled :

In the ordinary course of business, we may enter into transactions with portfolio companies that may be considered related party transactions. In order to ensure that we do not engage in any prohibited transactions with any persons affiliated with us, we have implemented certain policies and procedures whereby our executive officers screen each of our transactions for any possible affiliations between the proposed portfolio investment, us, companies controlled by us and our employees and directors. We will not enter into any agreements unless and until we are satisfied that doing so will not raise concerns under the 1940 Act or, if such concerns exist, we have taken appropriate actions to seek board review and approval or exemptive relief for such transaction. Our Board of Directors reviews these procedures on an annual basis.

ON THE BALLOT

In any case, neither of the two directors who resigned were up for re-election in the Proxy given that TICC has a “staggered” Board arrangement. Shareholders are asked to vote for two other long standing TICC directors (since 2003 !) Steven Novak and Charles Royce. The former is an independent director and was appointed the Chairman of the BDC back in March 2016, at the time when the Investment Advisor was being challenged by “activist” investors. Mr Novak is one of the BDC’s insiders, and a part owner of TICC Management, the Investment Advisor to TICC.

INDEPENDENTACCOUNTANT

Also up for a vote is ratifying PriceWaterhouseCoopers (all one word)  as the BDC’s independent financial accountant. Apparently, the accountants fees dropped in fiscal 2016 versus 2015, reaching $1.6mn. Likewise, with the departure of two independent directors, those fees should drop by about $370,000 a year, given that directors at TICC are well paid: $184,000 each for the soon-to-be-departed last year.  For shareholders that may be the best news in this Proxy.

CAPITAL RAISE

The most controversial proposal contained in the Proxy is one of the most routine at most other BDCs:  the right to issue new shares of common stock below Net Asset Value in the year ahead. The Proxy says there is no intention to sell at a price more than 20% below the current NAV, barring “extenuating circumstances” such as the need to avoid defaulting. The Proxy points out that TICC has not sold any shares below NAV since 2003 “other than in connection with rights offerings”.

CHANCES ARE…

So what are the chances of TICC actually pulling the lever if shareholders say yes ? The stock is trading at $7.21, not far below $7.53, and has been above book value at times. From the Conference Call, we know that the Investment Advisor remains bullish on CLO equity tranche investing opportunities. Moreover, TICC is reaching close to the 30% basket limit for investments such as CLOs and will have to increase the size of its “qualified” investment portfolio before the absolute size of “non-qualified” investments can be upped. The BDC Reporter would guess that a Yes vote by shareholders on this proposal means the chances of the trigger being pulled are greater than usual. Of course, if TICC’s stock price should increase only modestly the issue of selling below NAV will be moot.

WE ARE AMUSED

The BDC Reporter cannot help being amused that the very same Investment Advisor who sought to sell its management contract to a third party while explaining that investing in CLOs was the wrong way to go in a BDC wrapper and a change of strategic direction (and stewardship) was necessary, is back at the helm calling for more capital to invest -at least partly -in CLOs ! That was less than 2 years ago. We include here a link to one of the missives by TICC to its shareholders arguing as to why Benefit Street Advisors should be chosen as its Investment Advisor.

HOLD ON TO WHAT YOU GOT

TICC Management has done a remarkable job holding onto the management of the BDC despite challenges from several parties and a “shareholder revolt” which almost ended up with the loss of the Advisory contract. In return, TICC Management has had to reduce its Management Fee to match what others were offering, and made noises about reducing the Incentive Fee. Nonetheless in the first quarter of 2017 TICC Management still received an Incentive Fee of $1,053,480. In toto, annualizing the latest quarter’s fees the Investment Advisor is still receiving over $13mn in compensation even.

Shareholders- notwithstanding the recent surge in the stock price – have not fared as well. Just in the last year the BDC’s distribution has dropped from $0.29 to $0.20 a quarter, a (31%) decrease. Over 3 years the NAV of the BDC has dropped by one third as well and the stock price has dropped as much as two-thirds off its 2011 highest high, and is currently 43% off.  Maybe TICC Management was right two years ago about their business model being flawed…The BDC Reporter did have an in-depth look at the BDC’s financial performance and outlook, the conclusions of which we’ll share at another time.

LIKELY OUTCOME

This was just a Preliminary Proxy. A final version will be sent out before the meeting on July 6. We have no reason to believe – now that the “activist” shareholders have been pushed off or bought off or trundled off – that any of the proposals put to shareholders will result in a negative vote.  This might give TICC -rightly or wrongly – the first opportunity in years to reverse the decline in the size and capital of the BDC and return to the equity well. The stock is trading at 12.0x the latest GAAP-calculated Net Investment Income Per Share annualized, but pays a yield of 11.0%, which must account for much of the recent run-up in the stock. Apparently there are second acts in BDC-Land for Investment Advisors, even those who wanted to quit but were forced to stay. The BDC Reporter, though, would not be entirely surprised one day if TICC was not merged with sister public company Oxford Lane (OXLC).

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