Positive Catalyst For This 10.2%-Yielding BDC

About: Triangle Capital (TCAP-OLD)
by: Achilles Research

Triangle Capital is a business development company that fell on hard times in 2017.

The company slashed its dividend payout by a whopping 33% late last year.

However, TCAP announced the sale of its investment portfolio in early April. I discuss the deal.

An investment in TCAP comes with a 10.2 percent dividend yield.

In April, Triangle Capital Corp. (NYSE:TCAP-OLD) announced the sale of its portfolio assets to another investment company which was well received by TCAP's shareholders. I consider the company to be a "Buy" at today's price point, but only for investors with an above-average risk tolerance.

Triangle Capital's shares slumped in 2017 as the BDC revealed portfolio issues in the third quarter and saw a major increase in non-accruals.

Here are the company's non-accruals over the last five quarters (note the surge in non-accruals in Q3-2017):

Source: Achilles Research

Triangle Capital's underperforming investment portfolio eventually led to a major dividend cut in November, which investors used as an opportunity to dumb the BDC's stock.

Shares were obliterated in November, but they have bottomed out since and started a major recovery.

Source: StockCharts

I recommended Triangle Capital as a "Speculative Buy" after the company slashed its dividend in my article titled "This 12.6%-Yielding BDC Is A Speculative Buy On The Sell-Off". The article was published on November 17, 2017, when shares sold for $9.49. Today's share price: $11.72.

Positive Catalyst

I am still positive on Triangle Capital, largely because of a positive catalyst that occurred at the beginning of April: The company sold its investment portfolio.

Management said in 2017 that it was reviewing strategic alternatives for the company after a disastrous third quarter that saw non-accruals spike, which potentially included a sale of the BDC's investment portfolio to another asset manager. TCAP indeed announced at the beginning of April that it successfully sold its portfolio to an affiliate of Benefit Street Partners.

Triangle Capital Corp. agreed to sell its investment portfolio for $981.2 million in cash, and also entered into a "stock purchase and transaction agreement with Barings LLC ('Barings'), through which Barings will become the investment adviser to the Company in exchange for a payment by Barings of $85.0 million, or $1.78 per share, directly to the Company's shareholders".

The press release further discussed the benefits of the transaction for Triangle Capital's shareholders (emphasis mine):

The sale of the December 31, 2017, investment portfolio to BSP and the $85.0 million shareholder payment by Barings represent total cash consideration to the Company and to Triangle shareholders, net of the repayment of outstanding debt, of $691.2 million, or approximately $14.48 per share as of December 31, 2017, and 1.08x Triangle's December 31, 2017, net asset value per share. Net of estimated transaction expenses, other one-time charges and the repayment of outstanding debt, the sale of the Company's December 31, 2017 investment portfolio and the $85.0 million shareholder payment represents total cash consideration to the Company and to Triangle shareholders of $658.6 million, or approximately $13.80 per share as of December 31, 2017, and 1.03x Triangle's December 31, 2017 net asset value. The $13.80 per share total cash consideration to the Company and to Triangle shareholders represents a 26% premium to the April 3, 2018, closing market price of the Company's common stock.

Shareholders are about to get a special dividend of $1.78/share (if the deal is approved), paid by Barings, and retain $12.02 in value...that's not a bad deal at all considering that Triangle Capital Corp.'s share price sat at ~$11 before the deal was announced.

Source: Triangle Capital Investor Presentation

Here is a summary of the transaction terms:

Source: Triangle Capital Corp.

The share price surged ~10 percent after investors learned of the deal, for good reason.

The deal makes a lot of sense and - in my opinion - is in the interest of Triangle Capital's shareholders. The BDC's portfolio issues almost made TCAP uninvestable for the average retail income investor. The BDC burned its reputation as a well-managed business development company when its portfolio blew up in the third quarter, and management had few other options other than looking for a strategic buyer. Barings is a large, deep-pocketed asset management company that will ensure Triangle Capital's survival.

This is the new corporate/business structure going forward:

Source: Triangle Capital Corp.

What does Baring want to do with Triangle Capital?

Barings plans to run a senior-secured debt strategy with a target yield of 6 percent that is expected to increase to 8 percent over time which will dramatically transform TCAP as we know it today.

Source: Triangle Capital Corp.

A senior-focused debt investment strategy comes with multiple benefits, most importantly a greater degree of principal safety and a decrease in income volatility.

Source: Triangle Capital Corp.

Your Takeaway

TCAP's management presents shareholders with a decent deal here. Last year's portfolio issues have caused major reputational damage to the company, and income investors despise nothing more than an income vehicle that just slashed its dividend by 33 percent. Triangle Capital's shareholders - if the deal is approved - will get a special dividend of $1.78/share, and the BDC will survive under a new name. Speculative Buy.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.