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BDC Preview: Week Of April 1 – April 5, 2019

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Medley Redux Redux: Now that the vote on the three way Merger vote has been postponed for the umpteenth time, we’ll be looking this week for the reasons why the delay has occurred. That may or may not come from Medley Capital (MCC) or Medley Management (MDLY) by way of press release or SEC filing. Or, we might hear from one of the activists as to the why of the situations, or read a court transcript to learn what shareholders – who are mostly playing the role of spectator in this situation – have a right to know. Speaking of postponements, MDLY – according to Sentieo’s earnings calendar function – was supposed to deliver quarterly earnings before the open on Monday April 1. We’ve checked, and no results have been published. If and when MDLY does report, we’ll be looking for clues to the financial well being of the manager of both MCC and Sierra Income (SIC), and anything else that regulations force the company to reveal. Our current hunch – based on the price movements in the two Baby Bonds (MDLX and MDLQ) of MDLY late last week – is that some sort of deal is being concocted by MDLY, which might make the merger vote moot. There are two possible threads in this hunch of ours: MDLY is negotiating with itself (i.e. with the MCC and SIC Boards and their financial advisers) to come up with a revised deal that is more favorable to MCC shareholders. Then a new Proxy would be issued and a vote held within whatever the prescribed period is under stock exchange rules. The second thread is that MDLY – or its principals – are negotiating some sort of transaction with a third party that would be acceptable to MCC shareholders and ensure the asset manager does not go empty handed if divesting itself of MCC and/or SIC becomes necessary. (There is still the remote possibility that MDLY – like TICC Capital previously – just decides to do nothing. That would involve cancelling the vote; bringing on new “independent” directors for what are well paying positions; and just going back to business as usual. After all, the Medley financial organization – to the best of our knowledge – remains intact. What we don’t know if there is some financial or contractual pressure – including that strange arrangement with Fortress Capital and Medley Seed Funding – that might make that impossible. Yet another reason why reviewing the MDLY quarterly might be instructive).

Market Prices: The BDC common stock rally – which we call the Christmas Eve Rally – is long in the tooth. We’ve been headed in an upward direction since December 24 2018 or 13 weeks. Since late February BDC prices have been stalled but have not dropped 5.0% off their February 22, 2019 high, we’re still in rally mode. The weakness in the last 5 weeks – much discussed in far greater detail in our weekly Market Recaps – is worrisome but not conclusive evidence that the only way forward is down.  To judge where we are and where we might be going we’ll be interested to see if sector prices move up over the year-to-date high, which would be bullish. That’s less than a 3.0% increase – a distance that in late December or in January would be covered in a single bound (or two) – but now seems far less likely to envisage. However, markets often confound and surprise, so anything could happen.

Where the BDC Fixed Income sector is concerned, though, we do expect prices to remain stable in the week, even as the risk free rate dances around expectations for global growth. As we’ve been reviewing in the BDC Fixed Income Market Recap weekly, prices have generally moved back to 99% of where they were in 2018 before all markets sold off. At this point, we don’t envisage much more than a 0.3% move in either direction in the week ahead, in line with the remarkable stability of this still under-explored corner of the debt markets.

As we’ve seen with multiple new debt issues – including the first new public Baby Bond last week from Oxford Square (OXSQ) – the capital markets seem to be open to BDC issuers. We would not be surprised to learn of new public or private debt issuances this week. Great Elm (GECC) seems to be close to coming to market with a third Baby Bond but we don’t have the access to be a reliable prognosticator as to exactly when. Our research, though, indicates there are many, many BDCs with asset growth ambitions who will need more than an increase in their secured debt borrowings to succeed, so announcements of new issues could come from any direction. Keep checking the BDC Reporter’s News Feed on Twitter, which usually reports every material development within minutes of publication. An in-depth report takes a little longer, as we digest the new filings and compare and place the action in a proper context. Generally speaking the BDC Reporter writes 5-7 articles a week, or several hundred a year, and we cover all 45 public lending-focused BDCs.

KCAP Change: KCAP Financial (KCAP) is no more. As we write this Preview, the externalization transaction has been completed and the BDC has gained a new investment advisor. Also new is both the name and the ticker: Portman Ridge Finance Corporation and PTMN. Moreover, the record date for the former KCAP shareholders to receive a one-time externalization has been fixed as March 29, 2019.  Here are the rest of the details from the just published press release:

The payment date for the Stockholder Payment is April 1, 2019 (the “Payment Date”), on which an affiliate of BCP will pay a $0.669672 cash payment per share of the Company’s common stock directly to the holders of record of the Company’s common stock (other than the Company or subsidiaries of the Company or BCP) as of the Record Date.

Shares of the Company’s common stock will trade with “due bills” after the Record Date, representing an assignment of the right to receive the Stockholder Payment through and including the Payment Date.  Stockholders who sell their shares of the Company’s common stock on or before the Payment Date will not be entitled to receive the Stockholder Payment.

On April 2, 2019, the Company’s common stock, which trades on the NASDAQ Global Select Market, will cease trading under the ticker symbol “KCAP” and commence trading under the ticker symbol “PTMN”.

We’ll be very interested to see how PTMN trades now that the one-time payment has been made, and in the absence of much information about the balance sheet and earnings of the BDC until April, when the IQ 2019 results will be published. The BDC Reporter’s initial assessment of the BDC’s prospects was not rosy – as this article dated February 27, 2019 attests. However, we keep an open mind and reserve the right to make an about turn when get more facts. From a gamesmanship standpoint, we’ll also be interested to see if the commitment to maintain a $0.10 quarterly dividend for the first year by waiving some or all incentive fees due will keep PTMN’s stock price high for a period regardless of fundamental earnings outlook. At the moment, we don’t see how PTMN will be “covering” its $0.40 annual distribution this time in 2020 with earnings, but we could be wrong. Even the first quarter financials will tell us much.

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