Based in Los Angeles, California, Crescent Capital Finance (CCFG) scheduled a $125 million IPO with a market capitalization of $129 million at $15 per share for Wednesday, March 7, 2012.
CCFG is one of five IPOs scheduled for this week (see our IPO calendar).
Summary
CCFG is a junk bond Business Development Corp. (BDC, see below) that looks like it is set up to funnel to create profits for the manager, Crescent. It is buying a portfolio of $75 million from TCW, a very large money manager in Los Angeles, and will have $50 million left to invest.
There is a $.90 cent per share load built in that will be triggered to pay the underwriters $6 million if the when the fund pays more than 7% to shareholders. Competing BDCs pay much more.
Conclusion
Pass on this IPO and look instead at CCFG's competitors including the following.
Market | Current | Price / | ||
Cap (mm) | Yield* | Book Value | ||
Crescent Cap (CCFG) | $129 | n/a | 1.0 | |
Ares Cap (ARCC) | $3,680 | 9.0% | 1.17 | |
PennantPark Investment (PNNT) | $606 | 10.1% | 1.30 | |
Blackrock Kelso ((BKCC) | $720 | 10.6% | 1.03 | |
Apollo Inv (AINV) | $1,400 | 11.2% | 0.87 | |
Prospect Capital (PSEC) | $1,190 | 11.2% | 1.02 | |
*source: google finance |
Business
Crescent Capital is a Business Development Corporation - also known as a Business Development Investment Corp. - that typically registers as a Registered Investment Company for tax purposes, to be taxed like a REIT. Read here more about BDC's.
Junk Bond Portfolio
CCFG was recently formed to originate and invest primarily in secured debt (including senior secured, unitranche and second lien debt) and unsecured debt (including senior unsecured and subordinated debt), as well as related equity securities of private U.S. lower-middle-market companies.
CCFG is focused on companies with annual earnings before interest, taxes, depreciation and amortization, or EBITDA, of less than $40 million. These companies typically are highly leveraged, and, in most cases, will not be rated by national rating agencies.
If such companies were rated, CCFG believes that they would typically receive a rating below investment grade (i.e., below BBB or Baa, respectively) from the national rating agencies of Standard & Poor's Financial Services LLC, or Standard & Poor's, and Moody's Investor Services, Inc.
Distributions
CCFG currently intends to distribute during each calendar year an amount at least equal to the sum of: (1) 98% of its net ordinary income for such calendar year. (2) 98.2% of its net capital gains in excess of capital losses for the one-year period ending on December 31 of the calendar year. (3) any net ordinary income and net capital gains for preceding years that were not distributed during such years and on which CDFG previously paid no U.S. federal income tax.
Initial Portfolio
On February 24, 2012, CCFG entered into a portfolio acquisition agreement for $74.9 million with the seller, which is managed by TCW Asset Management Company and sub-advised by Crescent Capital Group.
The portfolio, as of December 31, 2011, consists of 155 issuers of 170 secured loans and corporate bonds having an aggregate fair value of $74.1 million as of December 31, 2011. You can see the portfolio in the SEC filing pages 62-67.
Competition
Looking at other Business Development Corporations it appears that CCFG has significant competition in terms of current yields and price-to-book value ratios.
About Crescent Capital Corp.
CCFG is a spin-off from Trust Company of the West (TCW).
TCW agrees to split off Crescent Capital Group on July 29, 2010, according to a Los Angeles Times article. At the time CCFG has $11.5 billion under management. However, CCFG's web site now says it has $9 bb in assets, down 22% from the initial spin-off.
Still, that's a considerable asset based from which only $75 million is being sold.
IPO Objective?
It strikes us that the CCFG IPO is a just a vehicle to increase management fees to Crescent Capital, and is not designed to be particularly favorable to IPO investors.
Investment Advisory Agreement
CCFG will pay CCFG Advisors a fee for its services under the Investment Advisory Agreement. This fee consists of two components: A base management fee and an incentive fee. The base management fee is calculated at an annual rate of 2% of gross assets (including assets purchased with borrowed funds or other forms of leverage).
The incentive fee consists 20% of CCFG's "pre-incentive fee net investment income" for the immediately preceding quarter, subject to a hurdle rate of 2% per quarter (8% annualized return to investors).
'Sales' Bonus To Investment Bankers
CCFG Advisors has agreed to pay the underwriters a sales load of $7.5 million, if pre-incentive fee net investment income exceeds an annual rate of 7% for one year after the IPO.
Dilution to Shareholders
That works out to $.90 a share dilution to shareholders, and makes CCFG overvalued relative to other public Business Development Corporations.
Concurrent Private Placement
At or prior to the closing of this offering, CCFG will sell $4 million in shares of common stock to CCFG Advisors, certain of its affiliates, certain officers, directors and/or employees, or entities owned by, or family trusts for the benefit of, such persons, and/or certain other persons or entities designated by Crescent Capital Group, in a separate private placement, at a price per share equal to $15.00.
Use of Proceeds
CCFG expects to net $128 million from its IPO, $75 million of which is allocated to purchasing a loan portfolio and the balance is for investment.
Shares Outstanding Post-IPO
8,601,000 shares (including 266,667 shares purchased in the private placement and assuming the initial public offering price is $15.00 per share), excluding 1,250,000 shares of common stock issuable pursuant to the over-allotment option granted to the underwriters.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
