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BDC Market Agenda: Thursday April 15, 2021

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On The Docket

BDC sector prices continue to trade modestly below their recent high reached on Monday, so nothing there to discuss. However, there are  other developments – each very different from the other – worth noting from Gladstone Investment, Prospect Capital and Sixth Street Specialty Lending which we’ve noted. All three news items leave the BDC Reporter with questions. Plus, PennantPark Investment has raised a significant amount of new unsecured debt, which makes the matter worthy of in-depth review over the week-end in our recap of what’s happening in the ever changing BDC Fixed Income universe.

  • Gladstone Investment (GAIN) Announces IIQ 2020 Distributions: The BDC announced an unchanged monthly payout of $0.07. That’s been going since an increase from $0.068 in January 2020. Also announced was a $0.06 supplemental “semi-annual” distribution , coming in June. This is interesting because GAIN indicated its intention to pay “semi-annual” payments back in 2020. Last year, on April 14, GAIN announced a $0.09 supplemental and a relatively rare “Deemed Distribution“, which required a special explanation to shareholders in the press release.

The interesting part is that after scouring GAIN’s press releases and website we can identify no other supplemental distribution since mid-2020, which means this latest $0.06 is more in the nature of an annual event at this point, and a third down from the last payment. We’re interested to find out how much undistributed taxable income from capital gains – after that very large deemed distribution and these other payouts – GAIN continues to have. This will affect how much in the way of distributions shareholders can look forward to on an aggregate basis.

Not to look a gift horse in the mouth but GAIN has booked a whopping $113mn in realized gains over the past three fiscal years ended March 2020 – nearly twice its Net Investment Income – and another $10mn in the first nine months of FY 2021 through December 31, 2021. Yet, since March 2017 the regular distribution has increased by only 11% and just 3 supplemental dividends have been announced.

That does not seem to have dampened investor enthusiasm, though, as the BDC’s stock price is headed upwards, challenging a multi-year apex set in 2019:

  • PennantPark Investment (PNNT) Prices $150mn Of Unsecured Notes:  We’ve been indicating since last week that PNNT was in the market with new unsecured debt. We now know the yield, the amount, the maturity, the form and – up to a point – the intended uses of the offering. We will analyze and assess this relatively large debt issuance – and its implications for the BDC’s common stock and public debt holders – in the BDC Fixed IncomeMarket Recap over the coming week-end.
  • Prospect Capital (PSEC) Tender Offer Amendment: The BDC sought to repurchase – for a slight premium – “$30,000,000 aggregate principal amount of outstanding 4.95% Senior Convertible Notes due 2022”. As we expected – given the BDC’s track record in this regard, its efforts were not crowned with much success. Only $50,000 was repurchased, or “0.05% of the outstanding notes”. We continue to wonder why PSEC repeatedly seeks to buy back debt at unattractive terms. This is a large, sophisticated group constantly in touch with the market. Yet another mystery from – arguably – the BDC’s sector most mysterious large-cap BDC.
  • Sixth Street Specialty Lending (TSLX) Files Proxy For Special Shareholder Meeting: On April 13, 2021 TSLX filed the paperwork to have shareholders vote on May 26, 2021 about a special request to get permission to sell shares at a price below book value, if deemed necessary. That’s not unusual either for TSLX or for BDCs more generally. TSLX had a similar request last year approved by shareholders.

Still, with the stock trading well above book and given that the BDC already undertook  secondary offering in February 2021, the BDC Reporter is a little surprised that yet another request is being made. Management and the Board will say its just an option and not likely to be exercised. However, these votes cost both time and money and leave shareholders with the risk of facing dilution at some point in the unknown future. Perhaps if the manager paid for the cost of these votes out of its own pocket rather than that of shareholders initiatives such as these would seem more equitable.


Credit

Yes, we’ve finally completed our now two part review of Ares Capital’s (ARCC) IVQ 2020 credit status. This involved both looking at data supplied by the BDC itself and the BDC Reporter’s own company-by-company analysis. At the end we came to a conclusion that we did not expect to at the beginning of the campaign about ARCC’s 2021 credit outlook. Premium subscribers can read Parts I and II of the credit review, here and here.  Included is a worksheet with all the BDC’s underperforming companies, according to our review.

We’ve not yet decided what to turn to next, but can assure you it will be a BDC with a much smaller number of companies to dissect.

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