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BDC Preview: Week of April 8 – April 12, 2019

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Medley Merger: The next scheduled vote on the merger of the three Medley Group entities into a public BDC fronted by Sierra Income, which will go from non-traded to public company, is another week away. Nonetheless, we’ll be looking out for developments during this penultimate week. There are still a number of outstanding items for which some resolution is required. Will Medley Capital (MCC) be following the instructions of the Delaware Chancery Court and providing an updated Proxy with a fuller account of how the merger was conceived ? Or has MCC – as indicated in when the judge’s opinion was first published – decided to appeal ? Or ignore ? Also, we wonder what the status is of the proposed transfer of the MCC SBA licenses to Sierra Income. Has the SBA – in charge of such things – decided to give the go ahead, or not ? That’s a major item. Also, the initial deadline for the merger is past. How will an extension be handled ? Also, what’s happening about replacing the “independent” directors and meeting stock exchange rules for corporate governance ? (We’ve written multiple feature articles about these and a multitude of other aspects of this subject. Just type “Medley” into the Search box at the top of the website and see what we mean !)

At the moment, we believe that most everything that is important to the shareholders of all three Medley entities – and to investors seeking an opportunity – is happening behind the scenes. NexPoint has made a new pitch to MCC’s shareholders – and its “independent” directors. For all we know the latter have taken up the challenge of negotiating with the would-be external manager. Then there’s Marathon Asset Management, waiting in the wings and possibly multiple other players.  Maybe some or all are negotiating with the Medley insiders and/or with the “independent” members of the Board.

We’re just as interested in who we’re not hearing from as who we are. FrontFour Capital has spent a good deal of money and time seeking to block the merger, but have gone quiet. Is that by court demand or is there something else going on ? We doubt the activist has folded its tents, despite not being able to get the court to block the vote, which will nominally happen. However, we won’t be placing any bets on the April 19 balloting day happening as scheduled.

Market Prices: As discussed in our premium BDC Common Stocks Market Recap article this week, the sector has been trending upwards price-wise. However, the BDC Reporter remains skeptical that this will continue, barring a broader move upward in most of the broader market indices. As a result, we’ll be watching the Wells Fargo BDC Index and the price changes amongst the 45 individual common stocks we track to see if we get a third week of higher prices or not. As of Friday, the index was 1.2% off its February 22 2019 YTD high and there were 17 BDCs trading above book value. We’ll be watching to see if the index breaks through to a new high and/or if more BDCs trade over their net assets. This rally has now lasted for close on 15 weeks. That’s not particularly long and there may be further upside, especially if sentiment generally remains positive now that the Fed has promised to keep rates low or lower. On the other hand, we also wouldn’t be surprised if BDC prices took a breather. The BDC Reporter will continue its Stock Watch feature, viz updating BDC sector prices at the end of every day. Intra-day we’ll note individual stocks reaching new 52 week highs or lows – all on our Twitter feed.

Alcentra Capital Price: Last week, Alcentra Capital (ABDC) suddenly decided to cave in to pressure from an activist investor, and elected to pursue “strategic alternatives” and hired Houlihan Lokey as financial adviser. The BDC Reporter covered the subject at length in a feature article.  We don’t expect to hear anything this week from ABDC – which has already told shareholders its lips will be sealed till some sort of conclusion is drawn. However, exercises such as these open a Pandora’s box of sorts and causes investors – always trying to get ahead – to evaluate what the BDC might really be worth.  Whatever consensus emerges in advance of any plan being mooted will be reflected in ABDC’s stock price. On the news the stock price jumped from $7.59 before the announcement to as high as $8.16 intra-day, but has dropped back to $7.99 at time of writing. Volume has been higher than usual, but not by any great multiple. Then there’s the downside to worry about. Has ABDC hired an adviser and bent the knee to its activist because there is even more trouble ahead in the portfolio than has already been revealed ? Again, we’re unlikely to get much in the way of hard news about that this week, but the ABDC stock price will reflect where investors are coming out, balancing between the opportunity and the risk.

Fixed Income Markets: The BDC Reporter has been projecting that multiple BDCs will be coming to the capital markets to raise more unsecured debt for many weeks now. With so many BDCs committed to taking advantage of the higher leverage allowed under the Small Business Credit Availability Act (SBCAA) adding debt is a major priority. To date there has been a moderate amount of debt raised, both in the form of institutional private placements and public Baby Bond issues. As readers know Oxford Square (OXSQ) was the most recent BDC to add to the ranks of the publicly traded issues, bringing the number we track to 42. See our feature article.  This week, we’ll be looking out for more would-be BDC borrowers. Our current best bet is Great Elm Corporation (GECC), who we expect to issue a third (!) public Baby Bond. However, there are numerous other candidates who could pop up. With market conditions issuer friendly – and fears about another late 2018-like downswing on issuers minds – we expect BDCs with debt needs to be anxious to get going.

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