After the close of the market Thursday, March 31, Kohlberg Capital (NASDAQ:KCAP) filed a Schedule 14-A calling for a Special Shareholders Meeting on June 16, 2011. The company has one scheduled item: Getting shareholders to agree to management’s plan to sell stock below NAV. Here’s the official language from the filing:
“To approve a proposal to authorize the company, with approval of its Board of Directors, to sell shares of its common stock, par value $0.01 per share, or warrants, options or rights to acquire such common stock at a price below the then current net asset value per share of such common stock, subject to certain limitations described in the proxy statement."
The company’s argument for this decision to seek emergency stock selling powers is summarized further in the filing, and we’ll quote again:
“The company maintains sources of liquidity through a portfolio of liquid assets and other means, but generally attempts to remain close to fully invested and does not hold substantial cash for the purpose of making new investments. In addition, on January 31, 2011 the company repaid in full the outstanding balance under its secured revolving credit facility and is currently operating fully unlevered. Therefore, to continue to build the company’s investment portfolio, and thereby support maintenance and growth of the company’s dividends, the company will need access to capital through the public and private equity markets enabling it to take advantage of investment opportunities as they arise."
KCAP Trades Below NAV, or Does It?
Amusingly, it’s hard to tell if the approval to sell stock below NAV is even necessary. KCAP is trading at $8.26, and the last published NAV was $8.21 at December 31 2010. However, that was before the company’s repayment of its debt facilities in January of this year. In the proxy management has not calculated a revised NAV, which seems a little peculiar given the special approval required of shareholders.
Looking Into a Glass Darkly
Nor has management given any further information about what the company’s balance sheet looks like post-payoff, nor what the company would do with the new funds. KCAP’s core investment assets in syndicated loans are yielding under 9.0 %, and the portfolio probably has several under-performing companies in the mix. Of course that portfolio is frozen in time, as Kohlberg has been unable to add any new loans due to its long stand off with its lenders, which blocked the company from adding new loans. Will KCAP continue to buy mostly senior loans in larger middle market and upper middle market transactions, or move toward the lower middle market? What type of yields will be targeted, and what types of credits? The company’s investment in its CLO subsidiary Katonah Advisors has been a godsend in recent quarters as CLOs owned and under management have resumed management fees and dividend payments. Yet, Katonah was recently written down. Is it Kohlberg’s intention to focus more of its future energies, and new capital, on Katonah? There has been no word.
Raised Convertible Debt
This has not stopped management from raising in a private placement $60mn in Convertible Unsecured Notes, with a maturity of 2016 and a coupon of 8.75%. (The conversion price is $8.44, only a whisker below the current stock price.) The transaction was announced just a week ago, and seems to have been successful as KCAP initially placed $55mn, and then was able to sell another $5mn on March 24.
Our Concern Spelled Out
Presumably the new lenders to the company have received some disclosures about KCAP’s future investment strategy, leverage goals, financing sources and dividend policy. Management and directors, as well as two institutional investors own a substantial portion of the company’s shares (see page 8 of the Proxy). They presumably know what the KCAP strategy looks like going forward. The rest of the shareholders (and any new investors that might come in as part of the proposed offering), though, do not know and there’s the rub. It’s hard to make an informed decision about whether or not to agree to a possible dilution for shareholders from a below NAV stock sale with such a paucity of basic facts (strategy, balance sheet, bad debts, etc). We’ll be keeping an eye out to see if KCAP’s management provides guidance as to its intentions in the future, but we’re pessimistic as this tight fistedness with information has been a feature of the company’s corporate DNA for awhile now.
Disclosure: I am long KCAP.