Triangle Capital (NYSE:TCAP) announced a 3.5 million secondary share offering (plus up to 525,000 shares for underwriters) this past Tuesday. Triangle is a smaller and newer BDC (IPO in Feb 2007 and a pre-offering Market Cap of 330 million), but they have managed to maintain a strong dividend throughout the economic downturn and currently pay the highest dividend (1.76 annualized) of the BDC stocks (Main Street Capital Corporation MAIN is second at 1.68). I read through the prospectus on the SEC website, listened again to the company's conference call, reviewed their Q2 2001 10-Q one more time and had these items to point out.
The offering is priced at 17.15 per share. Not all of the shares sold will go for that price. There is a discount provided to the underwriters (sales load .77175 per share) that is a little higher than another BDC such as Ares Capital Corp (NASDAQ:ARCC) paid in one of their recent offerings (at .7425 per share). TCAP is a much smaller firm than ARCC, so it makes some sense the investment banks would demand a higher fee. Still, as a shareholder, you want as much of the proceeds going towards new investments as possible. Given the discount and assuming the underwriters exercise their full over-allotment, the total proceeds will be $65.6 million dollars at a weighted share price of 16.30.
The current book value of TCAP is 13.79 with an outstanding share count of 18,625,238. While a new share issuance hurts current owners on the date of announcement (down 6.37% on 8/24), the new shares are accretive to book value. Even with the offering discount mentioned in the prospectus to the bookrunners, the book value should increase by a little over 3% to 14.24 immediately after the issuance.
What about the Dividend?
If you are like me, you immediately said to yourself - what does this do for their dividend coverage ratio? Here are some quick back of the envelope calculations.
The current Net Investment Income (NII) was 55 cents. This included a one-time gain of $1.7 million on the sale of a portfolio company which management was very quick to point out. Removing that number puts the NII at 46 cents. Increasing the outstanding shares puts the NII at .38 per share. The most recent dividend paid by TCAP was 44 cents, so this creates quite a gap for the company. However, TCAP has been in this situation before and as Nicholas Marshi suggested (and was proven to be correct), they were able to close that gap within the year.
With an additional $60m in cash available to TCAP + full use of their revolver, TCAP has some dry powder to put money to work. If they are able to close $30m of new deals (ambitious) during the quarter yielding 14% (as per management's view on current deals), they would add an additional $1m per quarter in NII which would give them the coverage they need for the new shares. Most likely this will not happen for Q3, but we could see this come to pass in Q4.
I believe this secondary offering should be additive to the company and management has shown a strong commitment towards covering the dividend with NII. One other bullish bit came during the conference call when CEO Garland Tucker, III mentioned that even with the dividend increase to 44 cents, they feel strongly about increasing that payout in the future (it is in his opening remarks on the CC). Most likely they knew about the secondary at the time of the call so there is a good chance the additional share count was in mind. Without making a recommendation on TCAP, I encourage everyone to review the company and decide on them yourself. If you are curious, they release an Investor Presentation a little over a week ago. This presentation is definitely an advertisement, but there are some charts that go along with my previous post.
There are some risks as well to consider. It is possible that TCAP will not be able to deploy the capital at the yields mentioned above and they could end up having a dividend shortfall. Also, TCAP only has 4 companies on non-accrual status, but given the recent market headwinds, the number could change.
Disclosure: I am long ARCC, TCAP.