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Stock Watch: Alcentra Capital

BDCs:
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This article was completed at 9:00 a.m. EST on Monday July 30, 2018.


NEWS

In early trading on Monday July 30, 2018 Alcentra Capital (ABDC) has traded at its 52 Week Low of $5.90.

For the current stock price click here.


ANALYSIS

There are no new SEC filings or news developments at the BDC, with the exception of an amended 13-D filing by an activist shareholder.

That was filed after the close on July 27, 2018.

Big Picture

ABDC’s stock price has now dropped (59%) since its highest point in recent years on April 10, 2017.

Key Metrics

The BDC’s dividend has been reduced twice by a total of (47%).

The current pay-out is $0.18 a quarter, or $0.72 annualized.

The yield at the 52 Week Low is 12.2%.

ABDC trades at a (47%) discount to book value.

That’s the second largest discount of the 46 BDCs we track.

Estimated Earnings

The BDC Reporter’s 2018 Net Investment Income Per Share estimate for ABDC is $0.85.

However, in the IQ 2018, the BDC booked a $0.27 per share return, or a $1.08 annual pace.

ABDC – at $5.90 – trades at a 6.9x multiple of the BDC Reporter’s projected earnings, and 5.5x the first quarter’s annualized rate.


VIEWS

Guessing Game

We suspect shareholders remain concerned that ABDC’s credit portfolio might continue to deteriorate.

Moreover, earnings are likely to drop regardless of the above as new management seeks to reposition the portfolio in lower yielding investments, which will reduce recurring earnings.

Forewarned Is Forearmed

The BDC Reporter published an advisory to readers back on May 25, 2018 regarding the sustainability of ABDC’s $0.18 quarterly distribution. Here is the jist:

“We AFFIRM our rating for Alcentra Capital‘s (ABDC) Dividend Outlook through March 2019 as AT RISK, after a review of the first quarter 2018 earnings press release, 10-Q and Conference Call transcript.

  • Although distribution was reduced sharply from $0.34 in the IIIQ 2017 to $0.25 in the IVQ 2017 and then to $0.18 from the IQ 2018, the risk of a further reduction in the next 12 months remains.

  • The BDC Reporter has identified 5 loans in the portfolio which could become non-performing, affecting  up to a third of adjusted Net Investment Income.

  • Outside of potential bad debts, earnings still under pressure as portfolio shrinks; and aggregate yields drop due to repositioning  into “safer” investments and one-time fee gains in IQ 2018 results do not recur.

  • On the plus side, dividend level has been sharply reduced to reflect most of the potential downside, and expenses reduced by look-back feature eliminating Incentive Fees and Management Fee reductions and waivers.

  • ABDC current yield is 11.1%, suggesting market also concerned about sustainability of dividend”.

Just Saying

Readers who heeded our warning might have saved themselves a subsequent (11%) stock price drop in the intervening 2 months.

Our own strategy is to avoid – except in certain Special Situations – investing in BDCs where we have doubts about dividend sustainability in the short run.

What To Look For Now

ABDC has not yet set an earnings release date.

However, when the IIQ 2018 results are published investors may want to keep an eye out for the values assigned to these under-performing companies in the portfolio:

  • Black Diamond Rentals
  • IGT, Inc.
  • My Alarm Center, LLC
  • XPress Global Systems
  • Conisus, LLC
  • FST Technical Services

All are – to varying degrees – at risk of defaulting in some form, which would affect the receipt of interest income or Preferred dividends.

Pro-Forma Only. Not A Projection.

In a Worst Case scenario, our internal calculations suggest that Net Investment Income Per Share might drop to $0.70 on an annualized basis if all troubled entities were to cease making payments.

Likewise, there is the possibility of further write-downs of these and other companies on the BDC Reporter’s Watch List, which encompasses 11 entities out of 34 in the portfolio.

By our count, Watch List companies have an aggregate value close to $50mn in a portfolio valued at $270mn.

Of course, these are just possibilities and actual company-by-company recoveries and restructurings may greatly improve ABDC’s actual results when each scenario is played out.

On the other hand, there may be further troubles associated with the 23 “performing” companies in the portfolio.

Another Explanation

Price moves can happen for a variety or combination of reasons.

This recent decline – which the BDC Reporter noticed as early as July 3 2018 (see chart) – may be actuated by selling activity by the aforementioned “activist” shareholder.

Unusual

Whatever the reason, trading volume just two hours into the trading day is nearly triple the daily average.

In some cases that causes a stock to establish a “bottom”.

Put In A Pin In It

We shall see and update readers if another material step down occurs.

Or a major bounce up in ABDC’s price.

In any case, ABDC seems to be one of the key BDC stocks to keep an eye on this coming earnings season, which begins July 31 !

See the BDC Earnings Calendar. 

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