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BDC News Wrap-Up: Thursday January 18, 2018

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In mid-morning on Thursday January 18, there have been a number of items of varying importance worth noting. Here are 4 very different items which readers should be aware of. For all the links, check out the BDC Daily News Table

New Unsecured Notes Issued: TPG Specialty (TSLX)

TSLX successfully issued and priced a 5 year Unsecured Note issue at a yield of 4.5% and raised $150mn. Apparently, the initial goal was to raise $100mn, but markets seem to have been receptive and the amount raised. Even before the ink was dry S&P gave the issue an investment grade BBB- rating. The monies will initially be used to repay Revolver debt. As has been the case with all the investment grade offerings by the bigger BDCs of late, this will not be publicly traded with a ticker and available to retail investors. However, there’s no denying TSLX has achieved a relatively inexpensive borrowing rate. Not quite as good as ARCC, which just raised 7 year debt at a quarter point lower, but still very good. Nonetheless, with its Revolver priced at LIBOR + 1.75%-2.00% (depending on usage), the new debt will initially cause the BDC’s interest bill to go up. That’s especially true when you throw in the costs associated with floating a new Unsecured Note like this one. Then there’s the increase in the unused Revolver (o.375% per annum) fee which will occur as the Unsecured Note proceeds pay down the secured debt. From a longer term standpoint, though – and even though TSLX has been shrinking in size of late and is under-leveraged – the debt raise makes sense. One of the two Convertibles which TSLX has on the books is coming to maturity in 2019. This additional unsecured debt provides the BDC with all the liquidity needed for several quarters ahead. The only surprising detail we picked up is that TSLX is considering swapping out its fixed rate obligation for a floating rate one to match its loan assets. That may be sensible but other BDCs seem to be bulking up on fixed rate debt on the assumption that rates will increase and the higher income from LIBOR and the fixed nature of their debt liabilities will allow them a windfall gain in net income. Maybe TSLX does not want to play the interest rate guessing game.

INVESTMENT DISCLOSURE: We have no position in TSLX’s common stock.

Reduced Quarterly Distribution: Newtek Business Services (NEWT)

NEWT is an idiosyncratic BDC, not like any of its 45 other peers as anyone who’s reviewed their business will know. That applies to its dividend policy. Most every other BDC seeks to maintain a stable, unchanged monthly or quarterly payout -giving shareholders the feeling that they’re invested in something more akin to a bond than a common stock. NEWT,though, freely admits to maintaining a flexible distribution policy, recalculated each quarter and targeting 90-100% of Taxable Income. For the last 4 quarters that has been an academic issue as the dividend has either increased or remained unchanged. This quarter, as has been the case in the past, NEWT dropped th payout for the IQ 2018 to $0.400 from $0.440. That may be a sign the imbroglio concerned one of its subsidiaries and the SBA, in which the FBI has been involved, has impacted earnings due to higher legal costs. Then there’s the cost of new senior managers brought on in the wake of the FBI raid on one of the BDC’s subsidiaries which presumably has boosted ongoing payroll costs. Or this just may be a seasonal issue. NEWT”s Dividend History chart shows these payout pullbacks have occurred in the beginning of the calendar year at least twice before. Reassuring to shareholders – and to the BDC Reporter – was management’s promise -repeated in the latest press release – that the BDC remains committed to paying an annual dividend of $1.70 in 2018, up from $1.64 last year. Like so many BDCs (as we discussed regarding MVC in yesterday Wrap-Up) NEWT uses the promise of a sustainable distribution (even if annually rather than quarterly) to keep its stock price up with yield and stability hungry investors. So the auguries remain good based on those reassurances for an unchanged or increased NEWT payout in 2018. However, we’re sure that if the problems with the FBI and SBA blow up all bets – and promises – will be off.

DIVIDEND OUTLOOK: We affirmed our rating of UNCHANGED for NEWT’s distribution for 2018 as a whole, despite this quarterly drop. The market, too, seems comfortable given that the yield remains under 10.0% and the stock price is basically unchanged following the announcement. We updated the Dividend Outlook Table with the latest data. 

INVESTMENT DISCLOSURE:  We sold out of our long term positions in NEWT on hearing of the FBI raid out of an abundance of caution. We have subsequently opened a small position in another portfolio – targeting morte speculative plays – as reflected in the Investment Disclosure Table. We note that the stock price has been volatile of late despite no material news. After the FBI raid news the stock ultimately dropped to $16.48 in November before jumping up through December 13 2017 to $19.20. NEWT has since descended to $17.78. We may add more to our position on weakness absent any new information. 

Receives Exemptive Relief: BlackRock Investment (BKCC)

Like many BDCs before them, BKCC have requested and received permission from the SEC to be allowed to invest – on  pari passu basis – with other BlackRock affiliates in new transactions. Once again, the SEC has allowed a deviation from one of the key provisions of the 1940 Act. Investors usually cheer these “exemptive reliefs”, encouraged that the BDC can tap into all or some of the deal making capabilities of the BDC’s Investment Advisor. The BDC Reporter has a more mixed perspective, worried that the BDC becomes just a “stuffee” for ever larger transactions arranged by the Investment Advisor. That has the effect of moving BDC investing away from its lower middle market and middle market roots and places the BDCs involved in competition for lower yielding loans in the segment just underneath large syndicated facilities. We wonder if – over time – that can generate a decent ROE for BDC investors. Moreover- putting our BDC Activist hat on for a minute – we’re disappointed that no BDC Investment Advisor EVER offers to reduce its Management Fees on transactions booked wholesale in this fashion.

INVESTMENT DISCLOSURE: We have no position in BKCC’s common stock.

Announces February to April Monthly Distributions Unchanged : American Capital Senior Floating Rate (ACSF)

ACSF is one of the 15 BDCs out of 46 in the universe we track whose Dividend Outlook is AT RISK of a cut in 2018, according to the BDC Reporter. We won’t recap all the reasons for our view, which is summarized relatively recently in an article written November 13, 2017. There’s also a Year In Review article which we published even more recently, just after Christmas. On January 18, 2018, ACSF announced another 3 months of distributions prospectively through April. The level of the payout is unchanged. However, there’s been no change in the fundamentals, and we remain unsure that this level of payout can be maintained for the rest of the year.

DIVIDEND OUTLOOK: We affirm our rating of AT RISK.

INVESTMENT DISCLOSURE:  We have no position in ACSF’s common stock. We note the stock price has been increasing of late as market participants – who caused the price to drop from $13.80 to as low as $10.35 in mid November 2017. With ACSF at the open on 1/18 at $11.00, there has been a modest bounce back, presumably as some investors start to wonder if a cut will really occur. 

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