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First Eagle Alternative Capital BDC: IIQ 2020 Results – First Look

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We’ve written this First Look after taking in FCRD’s conference call transcript and glancing at the 10-Q, so call this more of a second look. However, we’ve not yet reviewed the credit portfolio in the great detail deserved.  We’ve wavered between calling the results for the quarter FAIR or POOR, and eventually decided on the latter. Readers may disagree but here are the ingredients: NAV Per Share increased in the period to $5.54 from $5.22. In the third quarter there will be another boost to NAV from the previously discussed $20mn stock buyback. However, in the IIQ 2020 the new manager of what used to be THL Credit or TCRD booked major realized losses of ($26mn), equal to 5% of contributed equity capital. Furthermore – and disconcerting shortly after the BDC cut its dividend once again only last quarter – Net Investment Income Per Share (“NIIPS”) fell to $0.05 in the quarter. Admittedly, there were one-time costs depressing NIIPS, but even after adjusting for those FCRD’s result was $0.07, (30%) below the payout. Furthermore, these results do not include any incentive fees. Going forward for the next 3 quarters the new manager has kindly offered to waive management fees, and projects this will boost NIIPS by $0.03 a share. Looking beyond these temporary patches, though, FCRD seems to be earnings under $0.30 NIIPS on an annualized basis thanks to high cost of debt; lower yields and non accrual impacts. The portfolio yield is 6.8% and the cost of borrowing is 5.3% – a very narrow arbitrage by BDC standards.

Furthermore, we don’t know if we fully agree with management that the liquidity position is improved. In the press release FCRD pointed to $33mn in cash as of June. However, we all know $20mn of that was spent in July on the buyback. Another $5mn was invested in the beginning of the third quarter. Nominally there’s an offsetting  $53mn of unused line under the BDC’s only secured Revolver, but the 10-Q, CC and press release don’t make clear how much is actually available to be drawn. Until we learn something different, our Liquidity rating for FCRD remains POOR.

Finally, there’s the credit situation. Yet another – albeit small – company was added to the non-accrual pile in the IIQ 2020. At the moment, the BDC has “loans on non-accrual status with an aggregate amortized cost of $67.5 million and fair value of $40.5 million, or 16.2 percent and 12.2 percent of the portfolio’s amortized cost and fair value, respectively”.  That’s already a high percentage but is even higher when you consider that a quarter of the portfolio at FMV is invested in junior capital instruments like the Logan JV or equity investments. Also this is after those big realized losses booked in the quarter.

We doff our hat to First Eagle for having taken on this troubled BDC and following through during this pandemic with the equity injection and subsequent two-thirds buyback. Now we hear the Powers That Be at the asset manager are preparing to add a (presumably) safer asset-based product line for FCRD to participate in. We just wonder if it’s just too late. Management is clearly hoping to its biggest investment – OEM Group – and cash in its investment in C & K Market, to get a second lease on life. Unfortunately – as Dickens would say – this is the worst of times to be selling off portfolio investments at good prices. As a result – while we wish FCRD well – the BDC Reporter is maintaining a POOR rating on its Long Term Outlook.

For all the First Look reviews of IIQ 2020 BDC results, check out the BDC Data Table. We are constantly adding new updates as results come in and we undertake an initial survey. Besides these reports, we are also filling in NAV Per Share and investment portfolio size data to compare with prior periods; adding company or BDC Credit Reporter generated data on underperforming companies and assets and affirming or amending our earlier assessments of every BDC’s Liquidity, Credit, Dividend and Long Term Outlook

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