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BDC Wrap-Up: Wednesday September 27, 2017

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For Wednesday September 27, 2017, the News Of The Day article was about yet another BDC Baby Bond issuance. This time the issuer was Horizon Technology Finance (HRZN) and as is usually the case the new issue was intended to both reduce the BDC’s interest expense and push out the maturity date of medium term capital a few years. The BDC Reporter does not just summarize all the key details – most of which are found in the HRZN press release – but we also take the time to analyze what a capital raising of this kind is likely to have on the future earnings and on the capital structure. Moreover, given that HRZN is a BDC about which we have some doubts about the sustainability of its distribution over the next year, we reviewed with our Premium subscribers what the impact might be on the pay-out in the months ahead. If that wasn’t enough, we discussed at considerable length our own investment approach to HRZN’s common stock and Baby Bond, as we do after every News Of The Day update given that the stories we write about are “market moving”. We seek to determine in which direction that movement might be…


Main Street Capital (MAIN) announced a new lender was added to its credit facility, upping the limit from $560mn to $585mn. This will no immediate impact whatsoever, but does underline – if any emphasis was needed – that the BDC continues to be popular not only with investors but with bank lenders too. Elsewhere, Apollo Investment (AINV) indicated in a press release, that earnings will be released before the open on November 3rd, and the Conference Call will follow shortly after. The BDC Reporter continues to be unconvinced about the “turnaround” at AINV since a new CEO and strategy were announced. Back on August 11 – in an article which is now available to all readers – we asked rhetorically if AINV was over valued. Here is a long extract from the conclusion:

The BDC Reporter hopes AINV’s turnaround efforts will work out (pun intended). After all, we own the very expensive Unsecured Notes. However, the new Investment Advisor remains burdened  with numerous investments from their prior strategy which are major contributors both to NAV and earnings and which could yet drag down their results. Not helping is Apollo’s “aggressive” (to use the most diplomatic term we can come up with) restructuring of its under-performing investments which keeps income high in the short term but leaves the possibility of a sudden deterioration high.  Moreover, the unwillingness of the Investment Advisor’s parent – itself a public company with its own fiduciary responsibilities – to permanently reduce the cost of operating the BDC by cutting fees will also weigh on results from 2018 on.

We’ve not even had the time to weigh in on the continuing over-weighting of a few investments outside of the ones we’ve noted, which could bite the BDC and its shareholders in the future.

Taken as a whole, the BDC Reporter believes investors in the common stock are being asked to take too many “equity risks” at the current price level, which is why we believe the stock is over-valued. The new CEO may yet be able to steer through all these challenges and maintain the distribution at $0.15. However, our assessment is that at some point in 2018 – barring a drastic change in approach – AINV will be forced to admit that the pay-out cannot be sustained and implement another 20%-33% reduction in the dividend. Of course, with the market currently assuming everything is awesome at the BDC, such a move is likely to cause a sharp revaluation of the stock.  Just to throw out some price ranges, that could see AINV’s stock drop to $4.0 or below. For a stock paying $0.60 a year in distributions, the possibility of a $2.50 or more in price drop seems inappropriate risk-reward. We would be happy to be proved wrong but we point investors to AINV’s long term track record and ask why this time should be so much different ?

When we wrote that piece, AINV was at $6.27. At the close on Wednesday September 27, 2017 the price had dropped to $5.94 and has been as low as $5.89. That suggests other investors also have some doubts. The third quarter 2017 earnings release may push the needle one way or another. We’ll be watching and updating our view on News Of The Day. Readers who want to delve into our back catalog about AINV should click here.

Capital Southwest (CSWC) has been cranking out the press releases this week. After announcing a new portfolio manager earlier in the week, the newer BDC followed up with brief details about the booking of a new portfolio loan to a company called Zenfolio. No price or size details were offered up. What investors can glean from the press release – besides that CSWC wants you to know they’re actively booking deals – is that i) the investment was booked with a PE sponsor involved. (CSWC will do both sponsored and un-sponsored deals, but most anybody who’s been in the business admits having a sophisticated and potentially deep pocketed institution below you in the capital structure allows lenders to sleep better at night). Second, CSWC not only provided all or some of the debt involved (the press release does not say) but also invested in the equity. This is consistent with the BDC’s modus operandi and its ambition to build up – like Fidus Capital (FDUS) and MAIN and others – a “granular” portfolio of equity positions in lower middle market companies.  What investors lose out in current yield from capital going into non-income producing equity might eventually turn into a capital gain, if and when Zenfolio is ever sold for a profit. When well executed this is a winning business model, as several BDCs have shown. When badly executed, investors get the worst of both worlds: lower current income and a shrinking capital base. The BDC Reporter is giving CSWC every benefit of the doubt as its equity seeds have been planted very recently. However, given the BDC’s antecedents as an equity oriented BDC with a long and august history before its split into two companies in 2015, chances are CSWC has the right experience and mindset to be successful in its equity planting endeavors.  Premium subscribers will shortly be getting a review of our assessment of CSWC following a meeting we held with two of the senior managers, and when we have time on both sides to discuss some as yet unanswered questions. To see what the BDC Reporter has written about Capital Southwest so far, click here.

Gladstone Capital (GLAD), which had been in the news all week – and was the object of no less than 3 News Of The Day articles – announced the final terms on its new Term Preferred with the ticker GLADN, and the official redemption date of the existing issue GLADO on September 29. No great surprises in this cursory press release, as most of the news was known. Premium subscribers will shortly be receiving an updated Fixed Income Table, where we list out all the various public Baby Bonds, Term Preferreds and Convertibles issued by BDCs. Thee seems to be something to change almost every day, and we expect to be kept busy deleting, adding and amending through the rest of the year.


Although the BDC Reporter is tracking 16 BDCs in our Special Situations strategy (and is Long two: KCAP and TCAP), the market has not been obliging with much in the way of price changes. On Wednesday, the only 3% plus mover was OHA Investment (OHAI), which we’ve written about in the Wrap-Up so many times. We have nothing new to say except that OHAI closed at $1.26 and was at $0.93 as recently as September 11. Too risky for us but not for everyone.


Remember that the BDC Reporter is now including a full disclosure page showing all our readers every BDC common stock and Baby Bond investment we hold across all our portfolios. Just remember that holding a BDC security is not an endorsement thereof. Premium subscribers know what our views are of most of these investments from our News Of The Day “BDC Investor” discussions where we explain why we’ve bought or not bought a particular security, and what our underlying premise was.Ever there we’re not suggesting any reader follow our example as each investor’s goals, risk tolerance, return requirements, tax position and time frame are different. We provide our own investment approach and holdings only as an illustration of our own approach to the subjects we discuss every day on the BDC Reporter.  Every investor is a snowflake, each different from the other.

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