Solar Capital: Baby Bond Redemption
On November 15, 2017 Solar Capital (SLRC) filed a form regarding its 2043 Unsecured Note with the ticker SLRA. Here are the details, a brief analysis and our view of what this means for the BDC’s shareholders. We’ve also added a few words from the BDC Activist about SLRA.
SLRC – both in a filing and press release – announced the redemption of the remaining $75mn of SLRA.
Mentioned in the filing – but not in the press release for reasons that are unclear but would be useful to existing Note Holders – is that SLRA will be repaid December 18, 2017.
As discussed in an article on November 13, 2017, SLRC will use the proceeds of a new 2023 Baby Bond to repay the remaining $75mn of the $100mn SLRA Baby Bond.
The press release indicates the lower interest rate on the new unsecured debt and the repayment of SLRA will add $0.04 per share in Net Investment Income in 2018.
We have updated the BDC Fixed Income Table accordingly. Se the Tools section.
The repayment of the $75mn remaining on SLRA was expected since the BDC announced the new issue on November 13, 2017.
Notwithstanding the savings in 2018 from the refinancing, SLRC will have about a month of doubling up of interest.
The new Unsecured Notes will start accruing interest on November 22, and the $75mn SLRA obligation gets extinguished – as noted above – on December 18.
The first $25mn of SLRA that was called in October will be getting redeemed November 24, 2017.
The BDC will be using its Revolver to finance the November 24 repayment.
Unclear is why SLRC did not raise new unsecured debt in an amount equal with the SLRA Baby Bond.
This has been an ungainly two-step process, with SLRC first indicating only a portion of SLRA would be redeemed early (25 years early !) and the status of the rest was left vague.
A month later, the issue of the new Baby Bond was announced and the full repayment of SLRA.
This is disconcerting for the BDC’s Note Holders, who are left guessing as to whether or not it’s worth purchasing SLRA in the public market.
However, there is no arguing that SLRC will be saving a great deal of interest expense thanks to raising debt at a much, much lower rate from investors than before.
Partly that’s due to the bargain basement rates BDCs generally are able to raise capital at in recent months versus when SLRA was first issued. We’ve been beating the drum on this subject in our BDC Market Recap for the last few issues.
Also – as we’ve mentioned before – the maturity for the new Unsecured Notes is much shorter than what was issued before (2023 versus 2042).
A SIDE WORD FROM THE BDC ACTIVIST
We’re going to give occasional voice – where appropriate – to our alter ego the BDC Activist – in these articles.
The BDC Activist speaks up for BDC shareholder interests, cheering when BDC managers take “shareholder friendly” steps, and jeering (politely) when shareholder interests are ignored or spurned.
Think of us as the Superman of BDC shareholder rights zooming in when injustices occur.
(Unlike Superman, though, we don’t actually do anything except offer up our critique).
In this case, the BDC Activist cannot help asking aloud why BDCs like SLRC, but also Ares Capital (ARCC) – which inherited a very long dated Baby Bond from Allied Capital and did not immediately repay it, and Apollo Investment (AINV) which has a 2043 issue – bother to launch these very long dated issues ?
There was no mea culpa or even an explanation from SLRC as to why this change of heart about SLRA on its Conference Call.
However, by choosing a very, very long period for SLRA, the BDC had to pay a higher rate of interest than if a more “normal” 5 year bond had been issued.
Roughly speaking, we estimate that SLRC could have saved 1.0% on the Baby Bond’s yield by aiming for a shorter time period. On $100mn of SLRA Notes that’s $1mn a year of essentially wasted higher interest expense.
Using the latest shareholder count, that’s 2.3 cents per share per year of incremental interest expense that shareholders have incurred, not to mention the front-end costs of raising the debt, now spread over a much briefer period.
Furthermore, we’ve pointed out before – to an empty gallery – that many of these high yield Baby Bond issues are non-accretive for BDC shareholders. SLRA has fallen into that category.
The assets acquired with the Baby Bond issue do generate 10.0% per annum roughly. However, after deducting out around 7.0% for the cost of debt, 3.0% on incentive compensation; 1.0% for other operating costs and pencilling in 1%-3% for likely average annual credit losses over the period, you can see that none of that income is effectively being captured by shareholders.
So- the BDC Activist (if not the Note Holders) will be glad to see the back of SLRA.Already a Member? Log In
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