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BDC Market Agenda : Thursday April 1, 2021

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On The Docket

No April Fool’s here, just a few routine news items. However, at the open Ares Capital announced the date for the release of its IQ 2021 results (April 28), setting up the next BDC earnings season. That gives the BDC Reporter just under a month to continue its in-depth series of credit reviews. Here are the principal developments:

  1. Sixth Street Specialty (TSLX) and First Eagle Alternative (FCRD) Portfolio Company Repays All Debt: On March 30,2021 we received confirmation that Neiman Marcus Holding Company used the proceeds of a very large junk bond offering  raised weeks after its exit from Chapter 11 to repay all debt outstanding. As we discussed in an article on March 19,2021 that appears to mean TSLX will be getting repaid and so will FCRD, albeit in different facilities. That should be reflected in the IQ 2021 results of both BDCs.

2. New Mountain Finance (NMFC) Amends Revolver: In an 8-K filing, NMFC provided the details of the 6th amendment to its revolving loan, led by Deutsche Bank (“DB”).  The key provisions are below and suggest the BDC will be paying a little             less for this secured financing and receiving other more intangible benefits:

Pursuant to the Sixth Amendment, among other things, (i) the revolving period of the DB Credit Facility was extended to March 25, 2024 and the facility termination date of the DB Credit Facility was extended to March 25, 2026, (ii) the Applicable Margin for calculation of the interest rate during the Revolving Period was lowered from 2.60% per annum to 2.35% per annum, and the Applicable Margin for calculation of the interest rate after the Revolving Period will be 2.55% per annum, instead of 2.80% per annum, (iii) the concentration level for Non-First Lien Loans was lowered from 50% to 47.5% of the Excess Concentration Measure,  the  concentration  level  for  Second  Lien  Loans  was  lowered  from  40%  to  37.5%  of  the  Excess  Concentration  Measure,  the  concentration  level  for Multiple of Recurring Revenue Loans was increased from 25% to 35% of the Excess Concentration Measure, and a new concentration limit for Cov-Lite Loans equal to 50% of the Excess Concentration Measure was added, (iv) the following new Revaluation Events were added: if the Borrower sells or otherwise disposes of a Collateral Obligation at a price less than the lower of (x) 95% and (y) the currently assigned Discount Factor minus 2.00%, or if the related Obligor undergoes a merger, acquisition, consolidation or other restructuring or sells all or substantially all of its assets or acquires all or substantially all of the assets of another Person, and (v) certain other modifications were made to the DB Credit Facility, as set forth in Appendix A to the Sixth Amendment.

3. The external manager of Horizon Technology Finance (HRZN) to originate new $300mn debt portfolio:  On March 31, 2021 Horizon Technology Finance Management announced entering into an agreement with Waterfall Asset Management ” to originate and manage a venture debt portfolio. Horizon will originate and manage an initial commitment of $100 million, with the potential to increase to $300 million over time“.

All the economics of the new fund will accrue to the Horizon parent, but HRZN shareholders are being reassured that the new fund will allow the manager “ to access larger investment opportunities in emerging companies – and reach more of them, while further diversifying its investment portfolios and lowering its exposure to any single company and concentration risk in any industry“. That’s undoubtedly true, but still means the manager’s attention will be partly diverted from serving the BDC and its shareholders. We would suggest that the right thing to do – now that total Horizon group AUM will be greatly increasing – HRZN’s Board might consider reducing its management fee to a flat 1.60%. At the moment, HRZN charges 2.0% on assets up to $250mn and 1.60% on the remainder – an unusual hybrid arrangement.

4. Ares Capital (ARCC) Announces IQ 2021 Earnings Release Date: The largest BDC will be reporting its results before the open on April 28, 2021 and has scheduled its conference call for the same day at 11 a.m. EST the same day.

The BDC Reporter will be resetting its BDC Earnings Calendar for the IQ 2021, starting with ARCC.

Credit Review

Earlier this morning we completed our in-depth credit review of Capitala Finance (CPTA), as discussed in yesterday’s BDC Market Agenda.  Besides assessing the status of the 4 remaining non performing companies in the portfolio, the BDC Reporter highlighted 4 other underperforming companies in the 36 company CPTA portfolio.  As with our prior reports on WhiteHorse Finance (WHF) and Capital Southwest (CSWC), the dollar value of underperforming assets is relatively low, but there can be no assurance that all will end well. In the case of CPTA, the BDC has booked ($79mn) in realized losses over the past three years, so caution is the watchword.

Next on the docket for review is ARCC, which will be challenging given the large number of portfolio companies involved (350, or nearly a tenth of the entire BDC sector and ten times more than CPTA) and may require a different approach. This may take a few days to complete but given the importance of both the subject and the BDC involved (current market capitalization : $8bn) worth the effort.

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