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BDC Market Agenda: Monday April 26, 2021

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What’s Been Happening

As readers of the BDC Common Stock Market Recap and Fixed Income Recap through April 23, 2021 will know, both BDC common stocks and bonds are trading at 2021 highs as we begin earnings season this week. For the week’s schedule of BDC releases and conference calls, see the BDC Earnings Table.

In terms of news, there’s a miscellany of items as we seek to combine two days worth of reporting. (On Friday, we used up our full bandwidth writing about the proposed change of manager at Capitala Finance). We spend a great deal of time on one of the least read items to come out of BDCs: their annual proxies. This lack of interest from shareholders is a shame because these proxies contain a number of interesting revelations not found in press releases or other filings. Today we review Portman Ridge Finance and Great Elm Capital. Like we’re trying to do for every BDC – subject to time and space constraints – we’re highlighting insider ownership amounts and percentages; director compensation; manager fees and much else.

Prospect Capital Corporation (NASDAQ: PSEC) (“Prospect”, “our”, or “we”), announced today that our continuous preferred stock offering of up to 40,000,000 shares of Series A1, M1, and M2 with a $1 billion aggregate liquidation preference (the “Preferred Stock”) has issued $80.6 million in aggregate preference amount since the initial closing in the quarter ending December 31, 2020. Prospect issued $19.7 million in aggregate preference amount of the Preferred Stock since March 15, 2021.

We first mentioned this unusual form of financing back on August 3, 2020. For a more complete discussion of the benefits and risks of the new preferred instrument, we suggest reading our article of November 3, 2021.

  • Portman Ridge Finance(PTMN) Files Final Proxy:   PTMN have been in the news a great deal in recent days. On Friday, the BDC – soon to absorb Harvest Capital – filed its final Proxy for its annual shareholders meeting, to be held June 7. There are two routine matters put to the vote: director appointments and the blessing of the accounting firm. Then there’s the request to allow the BDC to undertake a reverse stock split, although the exact ratio has not yet been decided. This has become a regular occurrence in recent years as several BDCs have seen their stock trade below $5.0 a share, which does not look good and closes out some potential investors. The reverse stock split is an easy means to get the stock price trading at a high price again, even if nothing else has changed. To name a few, Apollo Investment (AINV); Capitala Finance (CPTA) and PhenixFin (PFX) have all gone this route, and the shareholders of PTMN will surely follow suit.

By the way, here is the insider stock ownership of PTMN, copied from the Proxy. We suggest reading the footnotes that are on pages 5 and 6 for anyone interested in the nitty gritty:

Number of Shares(1) Percentage of Class
Name and Address
Directors and Executive Officers:
Independent Directors
Alexander Duka  10,000 *
George Grunebaum  –  –
Christopher Lacovara(2)  212,634 *
Dean C. Kehler(3)  1,674,000  2.23%
Robert Warshauer  20,000 *
Matthew Westwood  43,263 *
Joseph Morea  18,210 *
Interested Directors
Graeme Dell  –  –
Ted Goldthorpe  97,651 *
Executive Officers
Jason T. Roos  –  –
Andrew Devine  –  –
Patrick Schafer  49,500 *
Directors and Executive Officers as a Group  2,234,013  2.97%
5% Holders
Sarpa Holdings LLC(4)  5,598,681  7.45%
Silver Creek Capital Management(5)  3,846,872  5.12%

Independent directors are paid between $70,000 and $85,000 annually to serve on PTMN’s Board.

Also for the record – although we draw no inference from the fact – PTMN is seeking the approval of Deloitte as the BDC’s new auditor, the third firm to serve in that capacity in the past two years. Previously, Ernst & Young and KPMG were dismissed. Regarding the most recent removal of the latter firm, the proxy offers the following (standard) language:

“During the fiscal years ended December 31, 2020 and 2019 and through March 11, 2021, there were no disagreements (as defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions to Item 304 of Regulation S-K) with KPMG on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedures which, if not resolved to the satisfaction of KPMG, would have caused KPMG to make reference to the subject matter of the disagreements in connection with its audit report, and there were no “reportable events” as that term is defined in Item 304(a)(1)(v) of Regulation S-K”.

We also looked at the compensation arrangements at PTMN, to compare and contrast with what the manager is charging versus the proposed fees at CPTA when taken over by a related group. Basically, the management fee is 1.50% on PTMN’s assets up to 1:1 debt to equity and 1.0% thereafter. The incentive fee is 17.5%, with a “hurdle rate” of 7.0%. There does not seem to be a “look back”   or “total return provision” , which is not shareholder friendly – by our lights – as the disclosure in the Proxy makes clear:

“To determine the income incentive fee, pre-incentive fee net investment income is expressed as a rate of return on the value of PTMN’s net assets at the end of the immediately preceding calendar quarter. Because of the structure of the Incentive Fee, it is possible that PTMN may pay an Incentive Fee in a calendar quarter in which PTMN incurs a loss. For example, if PTMN receives pre-incentive fee net investment income in excess of the quarterly hurdle rate, PTMN will pay the applicable Incentive Fee even if PTMN has incurred a loss in that calendar quarter due to realized capital losses and unrealized capital depreciation. In addition, because the quarterly hurdle rate is calculated based on our net assets, decreases in PTMN’s net assets due to realized capital losses or unrealized capital depreciation in any given calendar quarter may increase the likelihood that the hurdle rate is reached and therefore the likelihood of PTMN paying an incentive fee for the subsequent quarter. PTMN’s net investment income used to calculate this component of the Incentive Fee is also included in the amount of PTMN’s gross assets used to calculate the management fee because gross assets are total assets (including cash received) before deducting liabilities (such as declared dividend payments)”.

In a nutshell, the PTMN compensation arrangements could not be more different than what is proposed for CPTA. Which one is superior we leave to our readers to decide for themselves.

Total Comp

Net of waivers, the manager received $8.9mn in 2020 and shareholders $17.0mn, or 66% of total earnings before compensation costs. Interestingly, the incentive fee in 2020 was greater than the management fee, even as the net book value per share of PTMN dropped from $3.40 to $2.88.

It should be noted, though, that the manager has agreed to use up to $10 million of the incentive fee to buy newly issued shares of  common stock at the most recently determined net asset value per share .

“On December 1, 2020, certain affiliates of the Adviser purchased 204,708 shares of the Company’s common stock from the Company at a purchase price of $2.79 per share for aggregate consideration of approximately $572 thousand (which is equal to the amount of the Incentive Fee paid to the Adviser by the Company for the during the quarter ended September 30, 2020)”.

Final note: PTMN – unlike many of its peers – has not yet asked for shareholder approval to sell shares below book value.

  • Great Elm Capital (GECC) Files Final Proxy:  GECC is holding its shareholder meeting on June 4, 2021. The two matters up for vote are routine: director elections and the approval of Deloitte & Touche  as the BDC’s accountant.

Here is the insider ownership table for anyone interested:

Name of Beneficial Owner Shares Beneficially Owned  Percent of Class 
Interested Directors    
Peter A. Reed  264,504  1.1%
Erik A. Falk(1)  –
     
Independent Directors    
Randall Revell Horsey  26,041 *
Mark Kuperschmid(2)  35,917 *
Michael C. Speller  36,559 *
     
Executive Officers    
Adam Kleinman  79,496 *
Keri Davis  13,552 *
Directors and executive officers as a group (7 persons)  456,069  1.9%
     
5% Beneficial Owners
Great Elm Group, Inc.(3)  5,978,787  25.4%
Entities affiliated with Imperial Capital Asset Management, LLC(4)  2,170,115  9.2%
Entities affiliated with Northern Right Capital Management, L.P.(5)  1,356,819  5.8%

As with PTMN, and all other BDCs we’ve covered, we suggest reading the footnotes in the proxy for further color.

By the way, we checked back to last year’s proxy and did not find Imperial Capital or Northern Right Capital listed in the 5% Beneficial Owners section.

Recently Imperial Capital contributed 2 members to GECC’s Investment Committee for the first time. Here’s what GECC said on its most recent conference call:

Finally, as an externally managed BDC, Great Elm Capital Management, or GECM, is responsible for the day-to-day investment decisions impacting the BDC, and we are pleased to have added 2 new members to our Investment Committee from Imperial Capital Asset Management;Jason Reese and Matt Kaplan. Jason has been Executive Co-Chairman of Great Elm Group’s Board of Directors since February of 2020 and is the Co-Founder, Chairman and Chief Executive Officer of Imperial Capital Asset Management. Matt joined ICAM in 2020 after spending 4 years at Citadel from 2015 through 2019, investing in special situations and event-driven credit and equities.This is a significant development for the BDC. Our goal has been to both strengthen and broaden GECM’s reach and financial acumen. We’ve worked with ICAM for several periods now. We show the same philosophy about investment opportunities in credit markets. We are very pleased to have the benefit of Jason and Matt’s expertise, and look forward to working closely for the benefit of all shareholders in the future”.

It’s very unusual for a BDC manager to include parties from third party firms, and deserves note, even if we have no further light to shed on why this is happening.

The 3 “independent directors” are paid $65,000 annually.

Total Comp

In 2020, GECC’s manager received $2.5mn in management fees and $1.0mn in incentive fees. However, the latter was deferred but still charged in the P&L. Net Investment Income was $7.1mn, or 67% of earnings before compensation.

Also worth noting is that GECC has nearly $10mn of incentive fees earned but not paid sitting on its balance sheet.

In 2020, GECC’s NAV Per Share dropped from $8.63 to $3.46.

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