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Daily News Update: Tuesday October 31, 2017

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NEWS

The BDC news load is light for a change. The BDC News Of The Day already featured the October 30, 2017 after hours disclosure by TCP Capital (TCPC) of three estimated key metrics.

That item, and everything discussed below can be found in the BDC Daily News Table.

NEWTEK BUSINESS

Newtek Business Services  or NEWT- the most prolific press release generator in a crowded field – announced the addition of a new senior executive with a colorful headline: “Newtek Business Credit Acquires the Talent of Tony Zara”.  Given Mr Zara’s strong background in credit and with dealing with the SBA (principally on its SBA 504 construction loan program), and the fact that his title is “EVP: Credit & Risk Management” and he will sit on the Credit Committee of the NEWT subsidiary he is joining, the BDC Reporter assumes this hire may be an indirect reaction to the shocking raid by the FBI on another NEWT subsidiary last week. Here is the most useful article the BDC Reporter has written on the subject.

NEWT issued yet another press release. However, the subject was a $2mn investment in hardware and software at another one of its subsidiaries and involved augmentation to its client Cloud Services. Interesting, but unlikely to be useful to most investors in the BDC.


STOCK WATCH

In early hours trading on Halloween, the downward pressure on some BDC stock prices continued:

Great Elm Corporation (GECC) saw its stock price hit $10.0, scraping along a YTD low. The stock has been in gradual, but unrelenting descent, since August 31 2017 when GECC peaked at $11.18 a share. The BDC Reporter believes the price decline can probably be attributed to the ongoing sales by funds associated with the Investment Advisor (Great Elm Capital Management) and managed by MAST Capital Management LLC. These insiders own – as spelled out in this amended Schedule 13, 44.2% of GECC’s stock. At least that was the percentage on October 20 and followed continuous sale of stocks for at least the prior 60 days, as the filing shows. As recently as October 26 – according to the latest filing on the GECC SEC Filings page – Mast Capital was selling more shares. However, the number has dropped to 200 a day, presumably in an attempt not to disrupt the markets. (The average daily volume of shares traded is 38,000). However, other investors may see Mast Capital’s attempts to reduce or eliminate their stock position as a Bad Sign, which is pushing down the price.

The BDC Reporter flagged months ago – in one of our innumerable articles – that the insiders would be looking for a “liquidity event” as it’s sometimes euphemistically known. Here is the article from September 8, 2017 which discusses the subject head on. At the time, the disclosures were very explicit about the potential impact of having a major shareholder seek to sell its stock:

As the Prospectus warns, this registration and sale of stock “could cause the market price of our common stock to drop significantly, even if our business is doing well. Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the market perception that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock”.

We have GECC listed in our Special Situation Watch List, as we mentioned in our September article. However, as we said at the time “ just because a Special Situation exists, there is not necessarily an opportunity to profit”. So we’ve remained on the sidelines and even stayed away from the new GECC Baby Bond with the ticker GECCL until we get better optics about GECC’s over-sized commitment to Avanti Communications and the sudden change of direction at another portfolio company: Optima Specialty Steel. The Chapter 11 specialty steel manufacturer was first going to be rescued by Optima Acquisitions, LLC in the spring.  Here are some of the details:

As previously announced, the Agreement contemplates that the Company will emerge from Chapter 11 by the end of July 2017 through a confirmed plan of reorganization that will pay all allowed claims of creditors in full, in cash. The proposed plan will be funded by a $200 million cash contribution by OA plus debt financing of approximately $140 million.

However, the $200mn infusion did not happen. So Optima revised its plans and appears to have been acquired by DDJ Capital Management, whose proposal for restructuring the business appears to have been approved by all creditors and the courts just two weeks ago. Optima, though, remains in bankruptcy at time of writing, but expects to resume normal status shortly, almost a year since first seeking bankruptcy court protection. We’ve read a number of articles on the subject but cannot yet evaluate what the credit picture will look like going forward, or even if GECC still holds its debt position.

We’re also concerned about GECC’s $9.1mn at cost exposure to PR Wireless. When we have time we try to keep track of the several hundred under-performing BDC portfolio companies out there. PR Wireless is a name that we’ve had on our Credit Watch List for over a year, as this link shows.  From what we’ve been able to gather recently from the public record, the weather disaster that has overwhelmed Puerto Rico recently has only added to the question mark over PR Wireless.

Those 3 companies alone account for roughly a third of GECC’s total portfolio at fair market value…

TRIANGLE CAPITAL

Unrelentingly, Triangle Capital‘s (TCAP) stock price continues to head lower in advance of its IIIQ 2017 earnings release November 1, after the close. TCAP hit $12.33 a share early in the day, well below book value of $14.38.

The market price suggests investors are expected the current distribution to drop from $1.80 annually to $1.20-$1.30, a cut of as much as 33%.

Even more important than whatever the new dividend will end up being is how convincing TCAP’s management will be in convincing investors that the Worst Is Past and that They Have A Handle On Things, etc.

If that’s not the case, TCAP may face a situation like Prospect Capital (PSEC) after its dividend cut. PSEC’s stock price has  dropped from $7.0 a share at the time of the last earnings to around $6.0 at the moment as the debate about sustainability rages.

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