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TICC Capital: Reports IVQ Results

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NEWS

The CLO-centered BDC reported Core Net Investment of $0.17 per share, up from the prior period’s $0.13.

Net Investment Income was $0.15, slightly above analyst median expectations of $0.14.

NAV was up, despite a ($1mn) Realized Loss, to $7.55.

The dividend was unchanged for a fifth quarter in a row at $0.20. 


ANALYSIS

We have reviewed the earnings release and listened to the Conference Call.

In terms of initial analysis, the key point is that TICC is maintaining a high return on equity – Core Net Investment Income to Net Assets – of 9.5% ,despite having a low Debt To Equity, by ignoring the BDC rules on non-qualified assets.

Most BDCs seek to keep Joint Ventures and CLOs and other investments deemed Non Qualified at under the 30% threshold set by the regulations.

TICC has decided to go another way and has 38% of its assets in this category: all in the form of CLOs. See page 4 of the Investor Presentation.

This is like an adrenaline boost to earnings given that CLO equity’s average “cash distribution yield” is 20.2%, versus 9.7% on its qualifying loans.

No wonder then that CLO income (on a GAAP basis) outstrips “normal” loan income by $7.2mn to $5.6mn.

If we used the CLO number included in Core Net Investment Income the disparity would be even higher.

We are not aware of any other BDC with more than 30% of “non-qualified assets”.

Otherwise:

  • No information was provided about the ($1mn) Realized Loss. We assume CLO sales are the culprit.
  • The Unrealized Gain booked may have largely been due to an increase in the Birch Communications value. We await the 10-Q for more data.
  • The Board has approved a new stock buyback program, which may or may not be called on in the months ahead.

VIEWS

What We Have Here…

Management at TICC has a communications problem.

The answers given to analysts seem adversarial and as much is said as not said.

The same applies for what information is made available in the press release and Investor Presentation.

Reasonable Request

The key issue that most of the analysts – and investors – want to know is what the likely direction of earnings is likely to be and whether the $0.20 quarterly dividend is safe, not so long after the payout was sharply reduced from $0.29 a quarter.

Unfortunately, TICC appears evasive around these “bread and butter” issues.

The Numbers Do Not Lie. Just Confuse.

The numbers, though, show that TICC is still not close to earning – whether on a GAAP basis or “Core” basis – the $0.20 quarterly dividend.

That could be OK if the actual Taxable Income is higher than the GAAP or even the Core calculation.

Unfortunately management cannot – and will not – estimate what Taxable Income might look like.

Hands Tied

As explained again on the call to analysts who seem to forget from period to period, TICC does not get the breakdown of income between ordinary, capital gain and return of capital till the end of the summer after the end of its calendar year.

As a result, we are three quarters away from knowing whether 2017’s Taxable Income was equal, less or more than GAAP Income.

That juicy dividend shareholders are receiving may be part their own capital being returned to them, or not.

Tight Lipped 

Management would not be drawn on the subject, claiming a policy of not giving “forward guidance”.

We’ve listened to enough Conference Calls to know that most managers discuss the sustainability of their distributions – whether they want to or not – but TICC demurred.

Perhaps, Perhaps,Perhaps

Hints were made about using the relatively under-leveraged balance sheet (by borrowing against the non-CLO loans on the books) to boost earnings in the future or other measures too secret to mention to shareholders.

That information came out only because Chris Testa of National Securities asked a very direct question.

And so it goes.

Where We Are

Some time ago the BDC Reporter decided to steer away from investing in TICC for its own account.

(We continue to track the BDC both for our readers and because we hold a position in the BDC’s only outstanding debt, its public Convertible issue).

The first reason for staying away is the BDC’s heavy commitment to CLO investing.

There is good money to be made in this arena, but for anybody but specialists in this esoteric financing vehicle understanding what is going on is well nigh impossible.

Puzzling

There are nearly 1,000 different vehicles, each (as management reminded us again on the Conference Call) with its own negotiated terms between the holders of the different tranches.

The economics and the valuations can change wildly – especially for the equity tranche holders – given the eye popping leverage built into these asset based financing vehicles.

Furthermore, reported GAAP income depends heavily on assumptions about a multitude of factors over a multi-year period such as interest rates on loans, interest rates on borrowings, repayment rates, default and recovery rates.

Change one or two of those assumptions – as happens – and all the prospective results change.

Change Of Heart

Which brings us to the second reason we have decamped from TICC>

CLOs represent a difficult and volatile financing structure over a full cycle  to shoehorn into a public BDC, as the management confessed when seeking to sell the Investment Advisory contract a couple of years ago.

A new manager was going to be brought in and the whole strategic approach changed to something more akin to most other BDCs.

Shareholders were told then that BDCs and CLOs don’t mix well and should be glad to be extracted from this Rubik’s cube of a business model.

However, the sale of the Investment Advisory contract did not go through and those same managers have stayed on board and doubled down on CLO investing.

Should we believe them then, or now, or not at all ?

Lost

The IVQ 2017 earnings release and the Conference Call have only reinforced our view – which may not be right for many of our readers – that we are operating in the dark.

As a result, we intend to remain out looking in.

However, we’ll report back further if there is anything of interest disclosed in the 10-K when filed.

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