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Solar Capital: Prices New Baby Bond

BDCs:
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On November 13, 2017 Solar Capital (SLRC) completed the pricing of new unsecured notes. Here are the details; further analysis and the BDC Reporter’s views:


NEWS

SLRC raised $75mn in unsecured notes, due January 2023.

The publicly traded issue was priced at 4.5%.

The new notes will be redeemable at any time in return for a make-whole premium.

The proceeds will be used initially to repay any outstandings under the Revolver.

However, the availability thus created under the Revolver may be used to repay some/all  of the 2043 Baby Bond with the ticker SLRA.

The BDC had announced several days before its intention to pay off at least a portion of the 2043 Notes to reduce its interest cost.


ANALYSIS

Normally a BDC arranges new financing and then announces the repayment of existing debt with the proceeds.

In this case, SLRC started out by announcing  its intention to pay off  $25mn of the SLRA issue on November 24th in an official filing on October 24.

Only three weeks later, SLRC is issuing a new Baby Bond, with a shorter maturity, to pay-off effectively the entire longer dated note.

Presumably SLRC will shortly issue a second official filing, alerting the remaining SLRA debt holders of the repayment.

Before year-end, the SLRA Baby Bond should be fully paid off.

Unusual in a public BDC  unsecured note is the optional redemption at any time, which may cause the new issue to trade at closer to par in the future.


VIEWS

With this new issue, SLRC answers the question of whether a partially paid off SLRA would remain on the books.

The answer is No.

As far as we can determine, the BDC intends to retire its long dated and expensive Baby Bond with Revolver drawings and the $75mn new Baby Bond issue.

SLRA Note Holders are expected to receive 30 day notification of the second round of redemptions shortly.

The BDC Reporter has updated the BDC Fixed Income Table accordingly, but will be adding details (such as the final maturity date) as information becomes available.

Likewise, we don’t know if the “public offering” will be made to all investors and include a ticker, or will be placed with institutional investors.

The BDC Reporter will be seeking answers from our institutional broker: MS Howells.

For SLRC, the interest savings – thanks to both a shorter maturity and the welcoming environment – should exceed $2mn a year, and materially improve EPS.

However, in the short run, the BDC will have to contend with acceleration of SLRA’s amortized costs and the expenses associated with the new unsecured notes.

Finally, the interest rate which SLRC is paying on the new Baby Bond at 4.5% underscores the BDC Reporter’s more general observation about the BDC Fixed Income market that “good” players are able to raise medium term, unsecured debt at rates between 3-5%, and everyone else at rates between 5%-7.0%.


INVESTMENT APPROACH

We have a position in SLRA in both our Investment Fund and in a fixed income oriented portfolio.

In fact, we received a notice of redemption for the first $25mn just yesterday.

The Baby Bond closed at $25.28 on normal volume prior to the news of the new issue.

We will – in all likelihood – hold the SLRA position until full redemption.

We are unlikely to purchase the new Solar 2023 Baby Bond given the low yield.

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