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Triangle Capital: IIQ Earnings Disappoint

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BDC earnings press releases, 10-Q filings and Conference Call transcripts are coming in faster than the BDC Reporter can read and review, but we’re giving the challenge the old college try. We’re hoping the week-end will allow us time to digest everything published to date, short of our BDC Credit Reporter investment-by-investment analysis of each portfolio. However, we’ll never be able to write about everything we read right away so we’re sticking with the Big Stories so far. Here’s the first, featuring Triangle Capital (TCAP): 


BELOW EXPECTATIONS

To date – and per the usual – most BDC results appear to be as per market expectations. Just look at what happens to the stock price of your favorite BDCs in the immediate wake of quarterly disclosures for a sense of whether investors are going “ho hum” or “oh heck”.

In the latter category is TCAP, which has continued to disappoint, with further non-performing loans announced, notwithstanding a much over promised change in credit underwriting policies. Management on its Conference Call explained that the benefits of a more cautious approach to booking loans takes some time to show up, and troubled credits from the prior approach come out of the woodwork in the interim.

In fact, investors in TCAP or anyone interested in the sector should read the CEO’s comments on the latest Conference Call, which are relatively candid and revealing about this central activity in the business of being a BDC. For years TCAP was one of the most successful underwriters – especially when investment gains are counted as offsets to credit losses. However, TCAP remained too long – says the CEO – in the business of making higher risk- higher return mezzanine loans and has paid the price by having a series of deals go awry.

BIG DROP

This has been evident to the BDC Reporter (who used to be a Big Fan) and to the market for many quarters. The BDC’s stock price has dropped in half in recent years. Investors have been looking for the bottom, some indication that TCAP’s portfolio has stabilized from a credit standpoint.   Obviously confidence is very important when investing in lenders. BDCs which surprise to the downside over multiple periods can get permanent investor defections.

Unfortunately that’s happening here even as TCAP touts its new strategy of investing much more heavily higher up the balance sheet in safer loans. Not helping is the now almost certain diminished outlook for its quarterly distribution, which seems headed for the chopping block. This is likely to happen in the next couple of quarters, and the market will be trying to guess what that new level will be from the current $0.45 level.

The more important question – and the one that neither the CEO of TCAP nor the BDC Reporter- has an answer to is whether the latest credit troubles are the last in a long time or are just a way station on the way to even more credit let-downs.

OUR INVESTMENT STRATEGY

We have no position in TCAP, and have been on the sidelines for many months. Of course, with the stock price hitting new lows, the instinct to buy back in has returned. As we write this TCAP is trading at a level not seen since 2010, and $2.50 below the February 2016 low when all BDCs were in the bargain bin. However, this is still a slippery slope despite a -15% drop in the last couple of days. As we’ve said above, when confidence slips away, any predictability on the final resting place of the stock price goes too. We may be at TCAP’s bottom or we could be many more dollars away as the market adjusts to this latest punch in the stomach.

As a stable long term income investment TCAP is off of our list till we get a better sense of credit discipline and results under the new CEO and strategy. As a Special Situations, “speculative investment” TCAP is still too…”speculative”.  For our own account, and in both those broad investment strategies, doing nothing is best.

BABY BONDS

We do have a position in TCAP’s 6.375% Baby Bonds with the ticker TCCA in our Fund (which is BDC Note-focused), and have been invested therein for years, notwithstanding all the above. The Note matures in 2022, but can be redeemed at any time. We have no intention to sell out as yet, although redemption is always possible. Discouraging as the credit losses and drop in the stock price are, the secular shift by the BDC  to a greater proportion of senior secured loans is good for Baby Bond holders, secured by more liquid and less risky assets. In this case – and up to a point – shareholders loss is Baby Bond holders gain. This is reflected in TCCA’s price, which is 3% above par, and has remained unmoved by its parent’s plight.

We would not add to our position in our Fund (we’re maxed out size-wise) or any of other lower risk portfolios (given the high price and the redemption risk).

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