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Newtek Business Services: Stock Watch

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NEWS

Newtek Business Services (NEWT) reached a new 52 Week and 13 year High of $20.76 on an intra-day basis.

Here is the BDC’s lifetime chart:


ANALYSIS

The stock price is up on a 12 month and YTD basis.

However, the sharpest increase in NEWT’s price has occurred since May 1, 2018.

The price has risen from $17.78, or as much as 17% in just over a month.


VIEWS

There are two principal explanations for why NEWT’s stock has been rising so far and so fast.

Guesswork

First off, there MAY be a deal going on behind the scenes.

The BDC Reporter has suspected that NEWT may be up for sale or engaged in negotiations with a buyer for some time.

We were alerted by the BDC’s Proxy, which mentioned that the two senior managers (Eddelson and Schwartz) on April 1, 2018 renewed their employment contacts ,which included for the first time “non-renewal clauses and revised change of control provisions”.

These may just be a standard upgrade to the two managers employment contracts.

Putting 1 And One 1 Together

However, it is not unusual before a change of control for Boards to reward senior managers with this type of contractual protection.

Here is an extract from the Proxy regarding these additional changes to the contracts, which now are similar to what CEO Barry Sloane already enjoys:

Mr. Sloane’s Employment Agreement provided for a payment in the event of non-renewal of his employment in an amount equal to one and one-half  (1.5) times the sum of his annual base compensation plus any cash bonus or other incentive compensation paid in the immediately preceding fiscal year, or in the case of a change of control or termination other than for just cause, an amount equal to two (2) times the sum of the executive’s annual base salary in effect at the time of termination, plus the amount of any incentive compensation paid with respect to the immediately preceding fiscal year. In addition, in the case of termination other than for just cause, all outstanding and unvested equity awards are to be accelerated in full.
Ms. Eddelson’s and Mr. Schwartz’ Employment Agreements provided for a payment (1) in the case of termination other than for just cause, equal to one times the sum of the executive’s current annual base compensation plus any cash bonuses or other incentive compensation paid in the prior year, and (2) in connection with a change in control, equal to two (2) times the executive’s “base amount” as defined in §280G(b)(3) of Internal Revenue Code of 1986. In addition, in the case of termination other than for cause, all outstanding and unvested equity awards are to be accelerated in full.
Each Employment Agreement contained a non-competition provision that requires the employee to devote substantially his full business time and efforts to the performance of the employee’s duties under the agreement.
Caveat
However, we are just speculating.
There is a second – more prosaic – potential reason for the NEWT price increase .
The recent movement in the stock price also coincided with the adoption by the Board of the new leverage limits allowed by the Small Business Credit Availability Act.
Although the Board has not – for reasons unknown – sought to initiate a shareholder vote on the subject, NEWT will be free to lever up from April 2019.
The market may be reacting to the perceived opportunity for NEWT to achieve higher earnings from next year.
Management has been publicly enthusiastic about using the higher leverage allowed under the Act, but has not provided any new estimates of earnings that might ensue.
Still, no other BDC’s stock price has taken off in this fashion since the new leverage rules were announced.
Over Book
NEWT now trades at approximately a 37% premium to book value.
Conclusion
We lean more to the possibility that NEWT may be up for sale or merger than investors getting in early on possibly higher earnings.
However, there may be yet a third reason for this meteoric rise in NEWT’s stock price.
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