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BDC Wrap-Up: Friday September 22, 2017

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DAILY NEWS

The BDC News Of The Day completed a tri-fecta of reports about Gladstone Capital (GLAD) on September 22, 2017 for our Premium subscribers. The topic at hand has been the BDC’s latest issue of Term Preferred, and its impact on earnings, the balance sheet and the existing 2021 Term Preferred outstanding. However, it’s been an opportunity to educate readers interested in fixed income opportunities in the BDC space about the particularities of the Term Preferred structure compared to publicly-traded unsecured notes. We do tend to put unsecured debt of BDCs and Term Preferreds in the same bucket, but there are important distinctions and one is superior – in our minds – to the other.

OTHER NEWS

We were not able to prepare a Wrap Up for Thursday, so we have two days of developments to contend with.  Besides a flurry of GLAD materials, MVC Capital (MVC) filed its annual Proxy.  As you’d expect two standard issues to vote on: the election of Directors and the blessing of the independent accountant. However, there’s a third item slipped into the Proxy that’s anything but routine, inserted by a dissatisfied shareholder of the BDC, and which also gets voted on. That has caused a series of counter arguments  by MVC’s Investment Advisor. Whatever the outcome, this shines a bright light on some of the controversial aspects of the BDC’s performance. We will be writing a News Of The Day in-depth report for Premium subscribers about the Proxy over the week-end.

After the close on Friday, KCAP Financial (KCAP) announced its third quarter 2017 distribution of $0.12, the fourth in a row at this level. Again, that sounds routine but recurring earnings have been running well below the recently reset dividend AND the BDC has just radically rejigged its balance sheet and corporate structure, as we’ve been writing about. This free-to-all post from August 14 is a useful summary for those new to the subject. So the maintenance of the distribution at $0.12 seems to be a positive indicator. We’ll see how the market reacts – if at all- next week. [We are Long KCAP in our Special Situation strategy on the premise that the BDC might – at least for awhile – turn its earnings round. We’ve been concerned till now , though, about a potential cut in this quarter’s distribution].

STOCK WATCH

On Thursday, OHA Investment (OHAI) dropped back. Today, the smallest BDC’s stock price jumped up 8% to reach $1.20. We’ve been writing about this all week. The stock price is at a 6 week high, albeit from the lowest low point. Otherwise no other stock moved 3% up or down, which is our cut-off number. We are tracking 17 BDCs in our Special Situations Watch List, which includes OHAI. We are not brave/foolhardy enough – absent any real information – to buy OHAI’s stock but someone is racking up at least a paper gain. Elsewhere, Prospect Capital (PSEC) continues to remain low in price ($6.69), but has not collapsed sufficiently to be even a short -term Buy. With the latest earnings and the new, lower distribution in the rear view mirror and a leveling off stock price, we will remove PSEC from our Watch List till some new catalyst emerges. If there was to be “blood in the streets” where PSEC is concerned, that time has passed.

Triangle Capital (TCAP) is on the Watch List and has been climbing back from $12.94 to $14.03: an 8% increase since September 7th. We’ll be curious if the stock can rise higher from this level. [We bought TCAP at $13.03 as part of our Special Situations strategy on the premise that the stock was oversold, notwithstanding the very real challenges facing the BDC. We remain Long, but are considering our exit options 15 days after our original purchase].

On our Long Term Income Watch List – which includes only the BDCs that we could envisage in as a Buy and Hold – remains at 14 names. Both Newtek Business (NEWT) and Ares Capital (ARCC) are trading below our own assessment of Fair Market Value, but only just. In the case of NEWT, the stock is trading less than 4% off its 52 Week High. Given that we have an opportunity to meet the BDC’s CEO next week, we will wait and see. {We already have a position in NEWT in two portfolios, and are up 14% on an Unrealized Gain basis – which does not include any distribution received – so there’s no hurry to add to our exposure].  ARCC remains closer to its 52 Week Low than its 52 Week High, but our suspicion is that the price trend remains to the downside. ARCC peaked at $17.81 in March and has been tumbling downward ever since, to reach $15.85 at Friday’s close, but has been $0.20 lower recently. Will they or won’t they cut the distribution ? We favor a No vote, and are looking for a lower entry price. [We have a position in ARCC in a portfolio based on our Long Term Income strategy, but would add more dollars given the right price].

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