Technology Investment Capital: Under Pressure But Still A Good Buy

Judging by the stock price of Technology Investment (TICC),which just reached a 52 week low and has dropped over 40% from its high, the end of the world is here. From $17.52 a few months ago, TICC has dropped to just over the $10 mark. We're here to tell you the situation is not as dire as the stock movement would lead one to conclude. (TICC is a Business Development Company whose area of focus is providing senior debt to the technology industry).

Admittedly, TICC does have a problem: bad debts. The Company has 31 companies in portfolio, and 2 are in serious trouble. Genu-Tech started to deteriorate late in 2006, and Falcon Communications in spring 2007. Today, TICC has $28mn in non-performing loans out of a $400mn portfolio, or 7%. More importantly, the non-accruing income amounts to 10% of the Company's third quarter 2007 Net Investment Income annualized (after adding back non-accrued income). We've known about these two duds for months now, so the write downs (to virtually nothing) that TICC has taken are no great surprise. In fact, Genu-Tech has already been re-structured, with most of the debt outstanding converted to preferred stock. Only time will tell if TICC recovers any of the write-offs. In the meantime, TICC has lost about $1 in Net Asset Value per share, but the stock is down $7.25.

What is the market worried about ? More write-offs on the dreadful duo ? Probably not: both investments are pretty much fully written off (just $5mn left out of $29mn in original face value). Perhaps the market is worried about other portfolio companies deteriorating ? TICC's portfolio grading does not give any clues that there's a systemic problem. Outside of the Genu-Tech/Falcon fiascos (which are rated 5-write-offs expected), there is nothing rated 4 and just $61mn in the 3 rating (closer monitoring required but no loss of interest and principal expected). All other assets are in the two highest rating categories.

Maybe investors are concerned that TICC's dividend is in danger because of the bad debts ? It is true that the dividend announced for the IIIQ of 2007 was (at 36 cents) running ahead of Net Investment Income per share at 32 cents. For the nine months of 2007, the dividend has been runing at $1.08 a share. The Net Investment Income per share for the nine months was only $1.0. TICC has been paying out 2006 left over earnings of 5 cents, which means 3 cents a share of pay-outs has been a return of capital. Nonetheless, TICC's Board went ahead and announced a 36 cent fourth quarter dividend. They are probably sanguine because TICC has plenty of unused borrowing capacity: $36mn at early November. We should also point out that TICC's leverage is relatively low even for a BDC: debt is just 46% of equity (compared to 75-80% for most mature BDCs). This suggests TICC management could borrow up to $74mn more than is outstanding today, which could be worth up to 13 cents a share more in Net Investment Income per share. Most likely TICC's management has calculated that the two investments booked by the Company since the end of the IIIQ 2007 will bring Net Investment Income up to the dividend level in the next few months.

This suggests that the "running rate" of NIIPS will shortly be $1.44 (36 cents x 4), and could get up to $1.80 if leverage is brought up to 0.75 to 1. Compare this to today's stock price of $10.5, and the "running rate" yield is 13.7%. If TICC were to reach $1.80 in NIIPS, the yield would be over 17%.That's the upside. On the downside, if we assume all the $61mn in the 3 Rating category ends up in the non-accruing category , we still estimate that TICC will earn a NIIPS of $1.46, which is slightly better than today's "running rate".

We like the Company's long term prospects: the portfolio is becoming increasingly diversified, virtually all investments are in the senior loan category and management has recently made the decision not to limit themselves to the technology sector alone, which gives them room for maneuver. We also like that with the write-off of GenuTech, TICC has very little Pay In Kind [PIK] income flowing through its P&L. Moreover, in the post credit crunch environment TICC should be able to earn 100-150 basis points more on new loans than in the past. If we can believe that non-accruing loans will not exceed about $90mn on $475mn of fully deployed capital (i.e. 19%), TICC should still deliver a low teens current return, and still have a NAV per share higher than today's stock price. Or, put another way, bad debts could more than triple and TICC could still represent a good investment at these prices.

In conclusion, we're guessing the market is over-correcting on TICC and the $10.5 stock price is an opportunity. We should say, though, that there is one possible other explanation for the swoon in the stock price: liquidity. The Company's bank line expires in less than 6 months. Perhaps "those in the know" are aware that the line of credit is not being renewed or being scaled back. The recently released 10-Q is silent on the subject. Cautious investors might want to wait and see if the line with Royal Bank of Scotland is renewed, which the Company will be requirted to announce officially. Braver souls may not want to wait.

Disclosure: Author has a long position in TICC

Update: February 5, 2008: TICC announced the renewal of its Revolving Line of Credit with Royal Bank of Canada (agent) and Branch Banking & Trust for another year. This was good news in the midst of a credit crunch, especially as pricing was unchanged at (an expensive) LIBOR  +175 basis points. The "bad 'news" is that Commerzbank dropped out as a participant, bringing the total commitment down from $180mn to $150mn. TICC says it has never borrowed up to $150mn, but that's putting a brave face on the subject. Also, the line has been extended only for 9 months to January 2009, so lenders are keeping TICC on a short leash. We don't know what to think, so we'll wait for the IVQ 2007 Earnings report, due any day.

Comments

[herodotus]

thanks, looking around for info on TICC and this is a really excellent article. please keep it up!!! love to see an up date on the 4q numbers, too.