Solar Capital IPO Analysis

Feb.22.11 | About: Solar Senior (SUNS)

Solar Senior Capital (NASDAQ:SUNS) expects a $170mm IPO at $20, including a concurrent 500,000 share private placement, with 100% to be sold on the IPO, scheduled for Friday, February 25, 2011. Joint Book-Running Managers include Citi (NYSE:C), Wells Fargo (NYSE:WFC) Securities, Deutsche Bank (NYSE:DB) Securities, SunTrust (NYSE:STI) Robinson Humphrey; lead Manager is RBC Capital Markets. Junior Co-Managers include BB&T Capital Markets, Ladenburg Thalmann (NYSEMKT:LTS), and Lazard (NYSE:LAZ) Capital Markets.

Summary

Blank check SLRC is aggressively trying to obtain an 8% premium over its initial Net Asset Value (NYSE:NAV)), with no existing investments. A similar Business Development Investment Corp (BDIC) Solar Capital (NASDAQ:SLRC) -- run by the same management team as SLSC -- IPO’d a year ago at 95% of Net Asset Value. SLRC is up 35% to $25 and pays at a rate of almost 9% (annualizing a 95% payout of March quarter’s estimated earnings).

The older SLRC is currently priced at 10% over NAV, so why would investors pay 8% over NAV for a new, similar blank check fund (SLSC) with the same management but no current investments? The new SLSC fund anticipates its IPO funds will be fully invested within three to six months.

Golub Capital (NASDAQ:GBDC), which IPO'd April 14, 2010, is currently selling for 17% over NAV. THL Credit (NASDAQ:TCRD), which IPO'd April 10, 2010, is selling for 1% over NAV.

SLSC Valuation Metrics can be viewed here.

Business

This is a blank check closed-end private junk bond fund focusing on mid-market companies, formed in December 2010 as a newly organized business development company. For tax purposes it intends to elect to be treated as a regulated investment company, or RIC, under Subchapter M of the Internal Revenue Code of 1986, as amended, or the Code.

It intends to invest primarily in senior secured loans, including first lien, unitranche and second lien debt instruments, made to private middle-market companies whose debt is rated below investment grade, which SLSC refers to collectively as "senior loans."

Management Team

The new company will have the same management team as SLRC, with Chairman and Chief Executive Michael Gross and Chief Operating Officer Bruce Spohler. Gross is the former chairman and CEO of Apollo Investment Corp. (NASDAQ:AINV), where he helped raise about $930 million in gross proceeds in an IPO. He was also a founder and senior partner of private equity firm Apollo Management LP, where he helped manage $13 billion. Spohler was formerly a managing director co-head of U.S. leveraged finance for CIBC World Markets.

Employees

SLSC currently has no employees. Gross, the chairman and chief executive officer, and Spohler, the chief operating officer, currently serve as the managing member and a partner, respectively, of SLSC’s investment adviser, Solar Capital Partners. Nicholas Radesca, the chief financial officer and secretary, is an employee of Solar Capital Management, and performs his functions as chief financial officer under the terms of the Administration Agreement. Guy Talarico, the chief compliance officer, is the chief executive officer of Alaric Compliance Services, LLC, and performs his functions as the chief compliance officer under the terms of an agreement between Solar Capital Management and Alaric Compliance Services, LLC. Solar Capital Management has retained Mr. Talarico and Alaric Compliance Services, LLC pursuant to its obligations under an Administration Agreement.

Use of Proceeds

From the sale of eight million public shares plus 500,0000 shares to Solar Senior Capital Investors LLC in a concurrent private placement, proceeds will be used as investments in portfolio companies and to pay operating expenses, including management and administrative fees, and may pay other expenses such as due diligence expenses of potential new investments. The company anticipates that substantially all of the net proceeds of this offering will be used for the above purposes within three to six months.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.