Just weeks after going public, Solar Capital (ticker: SLRC), a newly minted Business Development Company (“BDC”), announced the sale of 5.89mn shares of existing stock held by many of the major shareholders. The stock market did not approve, trading the stock down 6% on the day to $22.07. That’s 9% down from the 52 week high.
We were curious and read the regulatory filings relating to the transaction, and came away feeling OK about the whole episode. Certainly the sophisticated investors who funded Solar Capital originally (the company is only 3 years old) appear to be making out well. If we read the filing right the selling shareholders bought in at a stock price of $15, so at $22 that ’s a nearly 50% gain.
However, the price is at or below Net Asset Value (“NAV”), which was pegged at $22.18 at the last quarter. Moreover, many of the biggest holders are retaining substantial positions so it’s a case of take (some) of your money and run. The two key managers are not selling any of their stock as far as we can tell.
We’d just reviewed the company’s financial performance just a few days ago and came away reassured. Whether deliberately or not, the balance sheet was looking clean. The 3 non-accruing loans on the books at year end 2009 were gone by the the end of the first quarter 2010.
Moreover, leverage consisted only of an $125mn Unsecured Term Loan, with all the company’s $270mn Revolver undrawn and $60mn in cash available for new business. Net Investment Income Per Share was running 4 cents higher than the $0.60 a share quarterly dividend, and prospects for earnings and dividend increases in 2010 and beyond seemed good if the economy remains on its current trajectory.
We don’t know the full story, but we also see a great opportunity in the refinancing of SLRC’s Term Debt, mentioned earlier. The loan, which matures in 2014, is priced at 8.75% per annum. As the company becomes better known on Wall Street, Solar might be able to refinance at a less exorbitant rate. If SLRC could finance itself at the same pricing as Blackrock Kelso (ticker: BKCC) the interest savings would be substantial: by our count over $6mn a year and worth 19 cents a share.
We understand that the hedge funds and high risk-high return investment crowd might not be interested in remaining fully invested in a steady paying BDC yielding a dependable but not exciting 10-11% per annum, but that does not diminish Solar’s attractiveness to the longer term, yield seeking investor. We wish the departing shareholders well, and do not see their defection as a sign of something fundamentally wrong with the company.
Disclosure: Author holds a long position in SLRC