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MVC Capital: Baby Bond To Be De-Listed And Redeemed

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NEWS

On December 14, 2020 Barings BDC (BBDC) issued a press release relating to the status of MVC Capital’s (MVC) Baby Bond with the ticker MVCD.

The announcement was made in anticipation of the expected merger of MVC into BBDC, where the latter will be the surviving entity.

Barings BDC and MVC Capital expect that the Notes will be delisted from the New York Stock Exchange (“NYSE”) in connection with, and contingent upon, the closing of the Merger, and trading in the Notes on the NYSE is expected to be suspended pre-market open on the day after closing. The Merger is anticipated to close on or around December 23, 2020, subject to MVC Capital and Barings BDC stockholder approval and the satisfaction of other closing conditions. After the delisting, holders of the Notes will continue to conduct business with and receive interest payments through the trustee, U.S. Bank National Association“.

The full press release is attached.


ANALYSIS

In The Cards

Ever since BBDC announced its intention to acquire MVC back on August 10, 2020 the BDC’s management has made clear its intention to redeem MVCD as quickly as possible.

As a result, the price of MVCD jumped from $24.36 to $25.15 overnight between August 10 and August 11, 2020.

At the close of business on December 14, 2020 MVCD was trading at $25.29.

Details

The next interest payment on the 6.25% yielding debt is due on January 1, 2021 and will be paid out two weeks later.

A final, partial payment of interest will be due and paid – likely in the third week of January 2021 – when the Baby Bond is repaid in full by BBDC.

Unexpected

Not previously known was that BBDC intends to de-list MVCD immediately upon acquiring MVC, just before Christmas.

Effectively that means MVCD will be removed from the BDC Reporter’s universe of 43 publicly traded debt issues in advance of the scheduled redemption of Gladstone Capital’s (GLAD) Baby Bond with the ticker GLADD.

GLADD is being called in January 7, 2020. See the latest BDC Fixed Income Market Recap in which the subject was discussed at length.

In short order, the universe of potential BDC debt investments will fall to 41 and may go to 40 if Capital Southwest (CSWC) continues to pay off its only public issue: CSWCL.


VIEWS

No Point

Unlike Ares Capital (ARCC), which adopted and maintained Allied Capital’s long dated Baby Bond (AFC) when acquiring that BDC, BBDC has no good  reason to maintain MVCD post-closing.

The unsecured debt was due to mature in less than two years (11/30/2022).

Furthermore, the cost of the MVC debt at 6.25% is substantially higher than what BBDC – backed by a huge insurance company – pays to borrow.

In November, BBDC raised 5 year unsecured notes at a yield of 4.25% and 7 year at 4.75%,  for a blended cost of 4.57%.

Furthermore, the BDC has another $25mn of unused commitment to issue more unsecured debt.

The chances are that BBDC’s cost of unsecured debt capital will be driven even lower in 2021.

So Long. Farewell

For MVCD debt investors, the upcoming redemption is a favorable outcome.

As an independent BDC – and one with numerous illiquid and underperforming investments – the value of MVCD always came with question marks.

The debt was not rated by either Moody’s or S&P and would likely not have received an investment grade imprimatur if that blessing had been sought.

Like many of its peers, during the March crisis, the value of MVCD dropped to $12.00, or (52%) off par, reflecting market credit concerns, amongst other things.

(AFC, by contrast, dropped -42%).

Investors will miss clipping quarterly coupons for that 6.25% annual yield but, otherwise, should be satisfied how MVCD has played out.

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