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BDC Daily News Wrap-Up: Friday December 1, 2017

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The BDC news flow has been relatively high all week. The BDC Reporter has written two major articles. First, on November 27th, we reviewed CM Finance’s (CMFN) latest debt arrangements, with the backdrop of the BDC’s continuing stock price drop. Next, on September 30th, we tackled the results of what used to be Fifth Street Finance but is now Oaktree Specialty Lending (OCSL). Unfortunately, our in-depth look at the results only hours after their release can be summed up with the phrase : “Old wine in new bottles”. 

However, there’s been much else besides that’s noteworthy. We can’t give the full court treatment to every BDC development right away, but we do record every item in the BDC Daily News Table, which is in the Tools box on the front page. If you haven’t yet discovered this new feature yet – only available to Premium subscribers and the only source for a compendium of every BDC development out there – have a look. We both provide the news headline – sourced from our subscription with Alpha-Sense which bills itself as the Google of financial research and provides very timely and comprehensive coverage – and brief analysis and commentary about the most salient issues. Plus a link to the source material for readers interested in further research. We’re also increasingly tying our news gathering and commentary with full disclosures about our own evolving investment approach towards all 46 public BDCs we track and the 80+ securities involved. Every time there is a news item we confirm our own exposure – if any – and briefly describe what investment actions have followed. We have a policy of not providing generalized investment recommendations, but we do offer an unusually high degree of disclosure about where we’re investing for those interested. 

When we have the time after reading all the latest press releases, news stories, SEC filings , presentations, Conference Call transcripts and after writing our News Of The Day feature stories, we circle back to the and pick out items that call for more discussion. Here are the latest:

Oaktree Strategic Income (OCSI):  The second former Fifth Street BDC – now advised by Oaktree Capital – reported IVQ and full fiscal year results. Oaktree – and shareholders – may be relieved that OCSI’s performance was not as disastrous as its sister BDC OCSL.  However, this is a relative matter. Total Investment Income was down in the quarter, and so was Net Investment Income Per Share, but only marginally from $0.20 to $0.19. More worrying – and where the BDC Reporter will be spending most of its time once the Conference Call has been held and the 10-K reviewed – is that the portfolio was written down by ($20mn) and that there are still 3 loans on non-accrual. For a BDC with a low risk-low return model (portfolio yield is 7.5%)  that’s still a very large number of non-performing loans. Under FSAM the BDC has lost more than a fifth of its capital at par. With current recurring earnings exactly equal to the $0.76 a year dividend (below if you exclude questionable PIK income) and OCSI’s debt to equity at a very high 0.9: 1.0 and no dividend announcement yet coming from Oaktree, readers will understand that the BDC Reporter has not changed our Dividend Outlook for OCSI from AT RISK between now and the IVQ 2018. In fact, chances are the new Investment Advisor will bite the proverbial bullet and cut the pay-out sooner than later. We will revisit our view once the 10-K has been digested. We should say, though, that the market appears confident that the dividend will not be cut. The stock price is up and the current yield is 8.8% (but still 14% below NAV). This may just be a bounce back from a pull-back that occurred for both BDCs before the earnings release. Still, if a 20% dividend cut does come, it’s hard to imagine the stock price standing still. In this case, the BDC Reporter and the markets are at variance. We shall see in the weeks ahead.

Medallion Financial (MFIN): BDC investors, get ready to say sayonara to Medallion Financial (MFIN). After changing its business strategy and it’s wonderful ticker (TAXI), MFIN is asking its shareholders to allow them to de-elect to be a BDC.  A vote – which was expected but never completely confirmed – will occur shortly on a date yet to be set. Even in a diverse BDC world, MFIN has always been an outlier. The BDC Reporter will shortly have to drop coverage of both the common stock and the Baby Bond, bringing our universe of BDCs tracked to 45. For our part, we’ve recently sold off a Special Situation position we held for awhile, leaving us with no exposure. We don’t anticipate investing in MFIN or Baby Bond MFINL before the BDC’s departure from our universe. As to Dividend Outlook, with no distribution, MFIN’s departure will have no impact.

CM Finance (CMFN): Another BDC in communication with its shareholders is CMFN. The BDC continues to seek approval to issue stock below Net Asset Value, as per those pesky BDC rules that so many players seek to circumvent with a shareholder vote annually. A third shareholder meeting has been set to vote on the matter. The BDC Reporter is wondering – aloud in this case – why CMFN’s Investment Advisor is trying so hard given that the stock is trading at a (31%) discount to book ! We’ve recently written a couple of articles about CMFN and pointed out that performance still leaves to be desired and the BDC may have liquidity problems coming up. (By the way – and to be fair to CMFN – that view is at variance with the positive approach taken on the most recent Conference Call). Paranoid as we are, we wonder if the Investment Advisor may be planning a below NAV offering if shareholders can be convinced to give the thumbs up in order to shore up the balance sheet. (It can hardly be because of the wealth of opportunities out there). If that does not work, CMFN could undertake a Rights Offering. Either alternative will not be good for the stock price or the Dividend Outlook,so we are staying away. The market appears to be worrying too: Here s the 6 month stock chart to save you reading a 1000 words.

PennantPark Floating Rate (PFLT):  The mid-sized, but ever growing, BDC announced quarterly and annual results. There was no great surprise in the earnings release, which suggested the current dividend level – unchanged for the past 3 years despite the ingestion of MCG Capital and several equity raises – will remain the same for 2018. However, the BDC Reporter still needs to read the 10-K and review the Conference Call transcript. “Trust but verify” as Ronald Reagan famously said in another context.

Capital Southwest (CSWC): Only an elite sub-set of BDC funds are actually raising their distributions. Saratoga (SAR) most recently did just that. Now it’s CSWC’s turn. In this case, the newer lending BDC has the benefit of an under-leveraged balance sheet. Still, 8 increases in a row is impressive. More importantly, the BDC Reporter’s Dividend Outlook for the next 12 months is for an UNCHANGED pay-out at the least. In fact, chances are best that the distributions will increase further. Unfortunately, CSWC’s high price – just 3% off its 52 Week and All Time High keeps us on the sidelines though we admire management’s performance to-date and the business model.

PennantPark Investment (PNNT): The former high flying BDC – brought down by a disastrous foray into poorly advised energy investments – reported full year results and held its Conference Call. We have not yet read the 10-K. Management argues that the strategic shift to a “safer” portfolio and resolution of the troubled energy investments is proceeding to plan. In a surprise move, the Board and Investment Advisor agreed on a permanent reduction in fees . (This is the quarter for permanent fee cuts). Nonetheless, the BDC Reporter continues to have a Dividend Outlook rating of AT RISK. Note that assets continued to be written down in the fourth quarter and the portfolio yield is slowly rolling down because of the risk re-positioning, which will impact Net Investment Income in 2018. With debt to equity at the BDC’s maximum preferred level, PNNT does not have much room for maneuver. We’ll have more to add in the days ahead.

MVC Capital (MVCB): The BDC has finally set the date for the redemption of its Baby Bond with the ticker MVCB. The proceeds for the pay-off came from the issuance of a newer Unsecured Note with the ticker MVCD. The redemption date is set at December 21 and will end the doubling up of interest expense that has been underway since MVCD began trading. That will burden this quarter’s results, but the interest savings will begin to show up in 2018. MVCG is trading at $25.29, as investors hope to collect back par and accrued interest in December. We have a position in MVCB, but not in MVCD. We remain unsure about the strategy of the BDC – which is undertaking a stock buyback as we speak – which keeps us from taking a position in MVCD. At time of writing MVCD was trading at $25.60, resulting in an effective yield of 6.1%.For all the details on MVCB and MVCD, check out the Subscriber-only Fixed Income Table.

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