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Nicholas Marshi  

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  • Gladstone Capital: What Comes Next? [View article]
    BDC BUZZ: I'm GLAD we agree (can't resist a pun).

    By the way, I featured your article and my musings on BDC Reporter this morning:
    May 18, 2015. 01:31 PM | Likes Like |Link to Comment
  • BlackRock Investment: From Bear To Bull And Back Again [View article]
    Thank-you very much
    May 17, 2015. 08:09 AM | 1 Like Like |Link to Comment
  • Gladstone Capital: What Comes Next? [View article]
    What I most enjoy about your series is the long term perspective so lost in a sea of articles about short term issues (mine included) , as has necessarily needs to be the case on Seeking Alpha. I especially enjoyed the 5 and 6 year table of Total Return. Shame you could not calculate Total Return since Inception (or did I miss that ?). I always like to say that you can invest in what might turn out to be a mediocre BDC, sail away to a desert island and return many years later and you will not lose money. Maybe you won't have made a lot of money but you won't have worried about the ups and downs that have occurred for those many years. That seems to be the case for GLAD if your desert island trip began in 2008.[ I'm not sure if your scheduled departure date was late 2006 -as per your wonderful chart, but if you bought at the IPO in 2002 and endured a near 50% reduction in the stock price and 40% in NAV, you still come out ahead thanks to distributions].

    However-looking forward-we don't have great enthusiasm for the Company unfortunately. Management points out that its credit record since the Great Recession is much better than what preceded (still being sorted out 8 years later !). However, the portfolio has not been put to the Recession test so it's too early to tell. The overweight in oil and gas (admittedly in different segments thereof) is worrisome, but so are the marks on some non oil and gas investments.

    Moreover, we question the ability of the business model to generate a decent ROE going forward. Loan yields are being pressured on the portfolio, while borrowing costs remain high if you consider the Preferred as debt (which it effectively is). That's squeezing recurring earnings, which is why management is having to waive its incentive fees to support the $0.84 distribution level (now annually versus quarterly) and are hoping to have a Realized Gain soon to be able to distribute to shareholders. Even if that is achieved (I'm guessing the sale of Funko but I could be wrong), the pressure medium term will continue as competition reduces yields going forward by much more than the modest decrease in Revolver interest will benefit.

    Management has pushed the portfolio size to its limit (asset coverage is at 215% versus a 200% minimum) so there's no help to earnings from that score. GLAD says they will be able to sell syndicated loans and roll them into originated loans but the yields on the existing syndicated loans are pretty high already so we don't see how earnings will move much from that shift.

    We just don't see the upside at these prices (even with the prospect of a nice Realised Gain coming) and the Analyst Consensus is for flat earnings at $0.84 into next year. At today's price of $8.73, GLAD is trading at around a 10x multiple. Then there is still the downside that might come next time the environment changes as it did in 2008. As your stock price chart shows (just look at 2006 versus today) the BDC market can be cruel and stocks can drop by two-thirds in price when recessions come along, and never "come back".

    Currently BDC investors are relatively bullish but the mood can change very quickly. Back in September last year the stock price dropped 14% in one week (mostly in the first few minutes).

    So we're staying away from the stock at these levels, but are Long the publicly traded Preferred (GLADO).
    May 16, 2015. 07:07 AM | Likes Like |Link to Comment
  • Fifth Street Senior Floating Rate's (FSFR) CEO Ivelin Dimitrov on Q2 2015 Results - Earnings Call Transcript [View article]
    May 12, 2015. 02:10 PM | 1 Like Like |Link to Comment
  • Fidus Investment Corporation Announces First Quarter 2015 Financial Results [View article]
    FDUS IQ 2015 EARNINGS AND CC: The BDC Reporter has not yet reviewed the 10-Q in detail, but have looked at the earnings report above and the Conference Call transcript.

    FDUS has all the same challenges as other BDCs late in the business cycle: spread compression; competition from multiple other lenders on structure; raising new equity in a BDC sector declining in investor popularity and the permanent risk of credit losses.

    However, the Company is executing better than most every other player in the space at this stage. First, there are no non-accrual loans, and FDUS continues to occasionally book Realised Gains that reduce the very modest $15mn in cumulative Realised Losses to date (a IIQ deal will result in a $5mn gain). Recurring earnings remain (slightly) ahead of the recurring distribution of $0.38 a quarter. The portfolio yield is still high (as it should be in the lower middle market), but likely to shift slightly lower.

    Importantly, liquidity is good with the Revolver currently un-utilized, extra SBIC borrowing capability kicking in and cash. The Company claims as much as $120mn in capital to spend (to add to $400mn in assets) and has access to an equity At The Market capital raising to boot. Plus the Company is trading at a premium to NAV and could raise more money. We don't mind when companies which have proven that their business model can generate a north of 10.0% return on equity over the longer term raise new capital, and FDUS is one of the few companies we can say that about.

    What we also like-and apparently so do some of the analysts-is that FDUS is "sticking to its knitting" and is in no hurry to grow assets at all costs. They are willing to have the portfolio size drop if the right deals are not available. This is critical at this stage in the game. He/she who will have the gold will call the tune during the Next Recession so being defensive is a GOOD THING, even if we don't see a march upwards in earnings per share.

    We-and others-also like that FDUS is not distracted trying to dabble in finding assets or businesses outside their core competence to take advantage of the 30% non-qualified bucket which obsesses so many BDCs trying to goose earnings in a ZIRP environment. Main Street and Triangle Capital have both shown a well implemented lower middle market mezzanine and equity strategy by a BDC can perform very well over time, and FDUS promises to join that august group.

    The stock has rallied 15% this year to $16.36 , but is 27% off its all-time high of $22.29. As we said FDUS is trading above NAV, so is not the bargain it was in mid-December 2014 at $13.71 (when it was trading at 8.1x future earnings and a 10% discount to book). The Analyst Consensus is for $1.69 in earnings in 2016, up from $1.56 annualised in the IQ. We'll be looking for a good entry point, which may be hard because Mr Market (and the analysts on the CC) seemed positive in the post earnings hours. To each their own, but we'll be buyers under $15.3.

    Looking forward, FDUS should also be the beneficiary of a possible increase in SBIC limits to $350mn which could-over time-allow the Company to get total assets up to $700mn or more. With 47 companies in portfolio already, the 70-80 investments that would be involved will be good news for investors seeking risk diversification in the lower middle market.

    Our Downside price for this stock is $12.5 (if Realised Losses amount to 10% of assets in the Next Recession), but the upside could see FDUS climb back over $20.0 (while still yielding 7.6% in recurring dividends) if they can preserve capital at current levels in all conditions and likely trade at 12x future earnings (not unusual for the few BDCs that can achieve those metrics). In our view FDUS is sitting mid-way from a valuation and risk reward standpoint: neither very cheap nor very expensive. If we were not 6 years into the expansion we'd be more bullish but the macro environment can be bigger than any one company, even one that is carefully finding its way.
    May 10, 2015. 08:31 PM | Likes Like |Link to Comment
  • Solar Capital misses by $0.04, misses on total investment income [View news story]
    Here is an example of the short sightedness of BDC investors and analysts. SLRC's share price is down 10% in the last month, and trades well below NAV after trading at a premium for a long time. Why ? Quarterly earnings were low at $0.34 versus $0.40 last quarter.

    However, SLRC has low earnings for just the right reason. Market activity was low in the first quarter so origination levels were lower than they might have been. All the fundamentals,though, appear to be excellent: Credit quality is excellent with only 1 non-accrual (direct Buy-which has been on the books for ages) and the portfolio valued at greater than cost. Their big outside investment Crystal Financial is doing well too from a credit standpoint.

    It is better for shareholders in the long run that SLRC's choose their spots, take their time and build a strong portfolio than throw their money away booking loans in a great hurry or use up capital in stock buy-back financial engineering.

    Late in the cycle as we are it is important to be very careful, and we're worried all the clamouring for higher assets/earnings from analysts (see the Conference Call) and the swooning stock price will cause SLRC to do the wrong thing. You always hear about how public companies have to deal with too much focus on short term results rather than being rewarded for a long term view. This seems to be one of those situations.

    Not that we're complaining because this is creating a buying opportunity in a stock that was too expensive for us for months. Under $18.0 this would be a good buy by our lights. Even at $18.75 we're intrigued...
    May 9, 2015. 03:13 PM | 2 Likes Like |Link to Comment
  • Why We Are Short Ares Capital [View article]
    Agree with your comments on ARCC, except the part about the Ares LLC buying the GE JV (presumably you mean stepping into GE's shoes). The Ares people are premium investors and unlikely to want to be in that low yielding an asset in either company, and probably don't have the capital anyway. We shall see before long, but my money is on a highly rated financial institution with no interest in originating. Still economics of deals will have to change and any change will be at ARCC's expense.

    As for SUNS: one of our favorite BDCs. Price still too high for us but we are very picky right now. Prefer PFLT because more comfortable with Art Penn for some undefinable reason and they have similar business models.
    May 7, 2015. 12:39 PM | 1 Like Like |Link to Comment
  • Why We Are Short Ares Capital [View article]
    UPDATE AFTER ACAS CONFERENCE CALL: We remain "short" ARCC even as the stock dipped and then has bounced partly back, so keep that in mind when reading our following comment, even though we're just trying to provide a complete picture.

    On the American Capital Conference Call, the once top BDC detailed how their new BDC spin-off intends to focus on Sponsor Finance for upper middle market leveraged deals, given that GE Capital is going through a change in ownership. Don't expect GE to go away, but to have a higher cost of capital which makes room for ACAS (along with the abandonment of this space by the major banks).

    In essence ACAS is going aggressively (needs to build up a portfolio and only 25% there as of now) after the type of deal done by ARCC on their own balance sheet (some of the time) and in the SSLP (all of the time). That's bad for spreads and may hurt ARCC's earnings regardless of anything else.

    Moreover, we were interested to hear the ACAS view that GE Capital will not be able to replicate its current low cost of debt. If that holds true in SSLP that may make their franchise with GE Capital less attractive, and less likely ARCC will be able to replace GE with an identical new partner.
    May 7, 2015. 12:00 PM | Likes Like |Link to Comment
  • Why We Are Short Ares Capital [View article]
    Thanks Capt Spaulding. This call has worked out so far so I'm delighted but I also bought FSC last year so I'm staying humble. For my short (and your getting back in) knowing when to close/buy is as critical as the first part (going short/selling). The stock is down today again, but GOOD news about replacing GE in the SSLP could happen at any time (though not for a few weeks we'd guess) and push the price up very quickly. We are holding on to our Short so we're tense.
    May 5, 2015. 02:25 PM | Likes Like |Link to Comment
  • Why We Are Short Ares Capital [View article]
    Robin-To your question about ARCC becoming a penalty box stock : There is a chance that could happen for a while. As discussed by seemingly everyone on the Conference Call, the problem lies with what happens on the SSLP. If there is no other institution like GE: open to leveraged lending BUT with a low cost of funds, the unique model of the SSLP will not be able to be replicated. After all, GE was not just providing capital, but was an equal partner in finding and booking these mammoth loans. That limits the universe of like-for-like replacements for GE. (None of the big asset managers fit the low cost of capital bill, large regulated domestic banks have obvious regulatory issues and most have been running in the opposite direction, insurance companies don't have the origination network and the nerve required, which leaves foreign banks, but that list must be short).

    ARCC has pointed out that they don't need a future partner to be a loan originator (they have an army of professionals in place) but who will be happy with getting the low returns that a non-originating partner would receive ? We estimate that a group that took the bulk of the lower risk second loss position on assets earning an average yield of 6.7% and not sharing in the origination fees might be earning only 5%. Is that worth the access to all these eminent sponsor groups so late in the economic cycle (even though ARCC continued to argue that conditions are good and should continue to be for a long time) ?

    So if you assume GE is irreplaceable on the existing terms and structure, there is a risk the SSLP might become more like a traditional off balance sheet financing with a cheap source of senior debt and ARCC taking the equity risk. IF you assume this JV could borrow half the portfolio value at 2.5%, the JV could earn an 11% yield. That's lower than today's return and more in line with the average ARCC portfolio yield. Moreover, thanks to the 30% basket in the BDC rules, the JV would need to be 50%-60% smaller in size than what's at play today. If ARCC decided they prefer (on a risk return basis) these big loans to what they have on their own balance sheet, they could continue to lend transfer some of the SSLP assets there. However, that would bring down the overall ARCC portfolio yield as these are far lower yielding thanks to ZIRP.

    Which is a long way round to saying that if the ARCC cannot show how they will replace the enhanced earnings coming from the SSLP the analysts will cut earnings projections (justifiably) and the stock price will suffer until it is clear what the Company's "new" earnings level might be . The Analyst Consensus is for $1.67 in 2016. If that were to be revised down by 10%-20%, we would expect a similar drop in the stock price to $13-14 a share.

    This is a big maybe and is unlikely to happen if GE can be replaced in a like for like manner. Markets hate uncertainty,though, and this is a big one. Unfortunately ARCC was not able to reassure anyone on the Conference Call about the progress of negotiations (even in that wink and a nod way that happens in the public world). I listened to the Conference Call and read the transcript twice more just in case but it seems nobody knows what happens next.

    We remain Short even while continuing to admire the management of this first class BDC.
    May 5, 2015. 10:27 AM | 4 Likes Like |Link to Comment
  • American Capital Senior Floating EPS in-line, beats on revenue [View news story]
    IQ 2015 REVIEW AND SCM VIEW: We reviewed the Earnings release mentioned here, but not the quarterly filing or the CC which is later today. Overall ACSF performed very well, as all the elements of the Company's business plan worked as expected. First, ACSF continued to have NO BAD DEBTS, and portfolio assets were valued at 98% of Cost. (The only slight hiccup remains CLO assets whose valuation has been dropping for 2 quarters and account for a fifth of the portfolio). Second, portfolio yield was UP, helped by higher CLO yields (ah, irony !). Third, ACSF continues to keep a VERY LOW COST OF DEBT (2.4% on a portfolio funded almost 50% with bank borrowings). Fourth, leverage came down ever so slightly but at 0.88x equity is still one of the highest in the BDC space. Fifth, management was active in seeking to improve results: buying and selling actively in the quarter.

    The key numbers turned out well with Net Asset Value up over the IVQ 2014, and Net Investment Income equal (on slightly less assets) and both Realized and Unrealized Gains to boast of.

    Shareholders should be impressed that the low fee charged by American Capital results in two-thirds of income reaching the Net Investment Income line, most of which is getting paid in monthly distributions. Moreover, ACSF continues to attract a high valuation by some metrics and not others. Based on expectations for flat earnings over the next year ($1.19 according to the Analyst Consensus) , the $13.4 stock price represents an above BDC average 11.3 future PE. However, the price is still at a 8% discount to NAV.

    The stock price is 7% off its February 2014 high, but so is every other BDC (more or less). ACSF is trading 11% below its recent low in late January and within a few cents off its 2015 high of $13.49.

    OUR VIEW: We have no position in ACSF and are unlikely to add any, notwithstanding the steady performance in this and prior quarters by the Company. The risk return is not adequate even below NAV. The yield is 8.7%.

    Our principal concern remains the high leverage of ACSF. Asset coverage is 205% by our calculation, just above the 200% minimum BDC regulatory limit. Any drop in loan market values will force ACSF to suspend cash distributions (BDC rules) or sell off assets in a hurry to remain within rules and to keep lenders happy. A modest 10% drop in asset values (we also test at 20% and 30%) would cause ACSF to sell 12% or more of assets. That would cause earnings to drop commensurately to closer to $1.0-$1.05 a share, and a reduction in the dividend.

    A full blown Recession would hit the valuation of the CLO investments by as much as half and the senior loan assets by as much as 20%. That could reduce asset value by 25% and reduce equity for a time by as much as 50%. Even if ACSF ends up losing no money to bad debts. It's the weakness in the BDC model: assets have to be valued at quarterly fair market value even if assets are being held for the long term and so equity will reflect what somebody is willing to pay for the portfolio rather than what it may earn. ACSF have chosen to embrace that risk fully (high leverage, reliance on Revolver funding).

    Perhaps, management feels they can navigate the volatile markets. We do not , even though we concede these low yield big cap loans represent the lowest credit risk in the non investment grade loan space and CLOs will probably be OK over time if not required to sell during a Recession (when they drop v sharply in value).

    This is a stock which is a good solid performer (well diversified and run by a highly experienced debt and CLO team who have been through the wars) but has no answer for the volatility of asset prices. As we saw last year when only a tiny fraction of loans on the books dropped in value (oil and gas) confidence can drop quickly. In a month ACSF's stock price dropped 12%. Even in a mild Recession that drop could be 2x-3X more pronounced next time.
    May 5, 2015. 09:49 AM | Likes Like |Link to Comment
  • BlackRock Capital NII dips in Q1 [View news story]
    Read the 10-Q with 40 minutes to spare. Here are key items we noted and questions that need asking:

    1. Credit quality on 45 investments seems good. Still, 5 biggest investments 25% of total portfolio.

    1.a. Credit ratings virtually unchanged in last 3 month. 5.5% of assets at FMV under5-performing to some degree.

    2. Watch List: Very quick review: New Gulf Resources secured loan carried at full value but unsecured written down 1/3rd. Happened in prior pewriod but worth watching.

    3. the unstated Realized Loss we mention above which held back NAV ffrom an even greater gain is Red Apple, which was "restructured" and became a Control company. We don't know the story but we assume many of our readers do.

    4. The largest Unrealized Gain left on books after realizing 2 investments is Penton. Cost $9mn. FMV: $70mn. Accounts for one-third of equity investment value. More if you take out long term Control equity investments. What happens to that investment could affect recurring earnings if invested in yield.

    5. What's the story with the Gordon Brothers investment. Nearly $100mn invested by BKCC on a company with $253mn in assets but no income to speak of coming to BKCC: $0.5mn in q.

    6. We reviewed the existing and new management fees. On first reading not elated by either. Will revert to subject when there is more time. Worth your time to read: Pages 25-28. Bring a calculator, a blank piece of paper, and give yourself plenty of time.

    7. Noted that 70% of loan assets are floating and two-thirds of those subject to floors. BKCC did not offer up a matrix of earnings impact at different rate levels.

    CONCLUSION: Nothing dramatic in the 10-Q on first review. Look forward to CC at 1:30 PST
    Apr 30, 2015. 04:12 PM | Likes Like |Link to Comment
  • BlackRock Capital NII dips in Q1 [View news story]
    A number of comments in no particular order:

    "Adjusted" Net Investment Income a little low on the quarter because fees were low compared to prior periods at only $0.2mn. Mild IQ loan activity for new loans and repayments seems the culprit. As BKCC anxiously points out,though, recurring interest income is up 8%.

    We assume the subject everyone will focus on in the upcoming Conference Call will be the 100% coverage of the dividend by adjusted recurring income. Analysts and investors like a bigger cushion that what is available. BKCC is trying to address that issue in the press release, with this comment:

    "We continue to redeploy proceeds from equity sales into income producing assets, and our run rate net investment income, pre-incentive fee, excluding any fee income, is $0.21 per share on a pro-forma basis as of quarter end, consistent with our quarterly distribution. "

    Still investors may worry that another dividend cut might be in the offing and bring down the stock price just as BKCC's Net Asset Value is at the highest level in 7 years and the portfolio is at big as its ever been. In the early market,though, the price is up slightly.

    With the savage competition in the loan markets keeping yields down, BKCC can only hope to increase Adjusted Net Investment Income by leveraging up. That would be a shame this late into the cycle.

    We like BKCC's business model of keeping 80% of its portfolio in yielding assets, which pay a decent distribution; and 20% in equity whose potential gains may offset credit losses to keep NAV stable over the long term. [Unfortunately, BKCC lost a boatload of money in the Great Recession, which will probably never get "recovered" with equity gains]. We also BKCC's strategy of maintaining relatively low leverage compared to peers. That means the yield on NAV is low at 8.0%.

    We are hopeful that BlackRock has learned something from the Great Recession and will be more circumspect about risk management just as they take over from Kelso and as the balance sheet is healing. However, we do not really have any idea from the Conference Calls what approach the new sole External Manager will take. Will we see assets grow and asset coverage diminish ? Will there be yet another high yielding JV announced with some third party ?

    We were a little disappointed to see the Company mention the two Realized Gains in the quarter, but not comment on the -$6.4mn Realized Loss in the quarter. With no SEC filing yet, we don't know which Controlled investment that was but it did bring Realized Gains down by 43% and NAV by 7.5 cents a share.

    We have no position in BKCC. We sold out a few weeks ago. The stock price has been in a holding pattern for the past 2 months. I doubt today's results will allow BKCC to break out towards our prior Target Price of $9.90 or up to NAV at $10.58, but you never know. Even at $9.20, BKCC is too rich for our blood. If you reserve for potential credit losses-as we do in our underwriting-the "true" value is somewhere under $8.0 and recurring income/distributions are lower too. It's a good company but most every BDC common stock remains over-valued and BKCC is no exception.
    Apr 30, 2015. 10:24 AM | Likes Like |Link to Comment
  • MCG Capital finds a buyer [View news story]
    I had forgotten that. Thanks
    Apr 30, 2015. 08:48 AM | Likes Like |Link to Comment
  • MCG Capital finds a buyer [View news story]
    PFLT is one of the better BDCs, albeit untested in a Recession. Art Penn has built a very good franchise with two BDCs and without the one sidedness of some other asset managers.
    Apr 29, 2015. 05:16 PM | Likes Like |Link to Comment