On January 4, 2016, TICC Capital (TICC) confirmed that the Company had repaid its $150mn credit facility with Citibank. The intention to pay off the credit facility (which otherwise would have wound down in 2017) was announced in December 2015, as part of a "revised strategy" by TICC Management to sell off certain lower yielding assets. Press Release: finance.yahoo.com/news/ticc-announces-fu...
ANALYSIS: No surprise here as TICC had telegraphed its decision to repay the $150mn in debt, and gain unfettered access to $291mn in pledged syndicated loans ($141mn at FMV after paying off Citibank).
What we don't know how many more loan assets were sold off prior to the announcement of the intention to pay off Citibank, or after. We know that TICC bought back $10mn in shares on December 3 2015, but nothing else.
We know TICC had $0.6mn in capitalized facility costs at 9-30-15. Here is a quote from Page 41 of the 10-Q:
Deferred debt issuance costs represent fees and other direct incremental costs incurred in connection with the Facility. As of September 30, 2015, TICC had a deferred debt issuance costs balance of approximately $0.6 million. This amount is being amortized and included in interest expense in the consolidated statements of operations over the term of the Facility.
These costs will be written off in in the IVQ of 2015.
Between the Revolver pay-down and the share buy-back, TICC's cash and investment assets must have dropped AT LEAST by $160mn since 9-30-15, or 17% to $767mn from $927mn.
On a pro-forma basis paying off $150mn in debt (out of $501mn at 9-30-15) will have improved asset coverage to around 220%, everything else being equal.
What we don't know is whether TICC has been generating cash to pay off the Revolver and buy-back stock by selling off CLO investments. The Company has made no announcement on that subject.
However, if all the $160mn in assets sold off since 9-30-15 were in the form of syndicated loans, TICC might have a problem with the Qualifying Assets requirement under BDC rules. At 9-30-15 Investment Assets were $927mn. Of that $239mn at FMV were in the form of Non Qualifying CLO investments, which are limited to a maximum of 30% of the total, and had reached 26%.
So if all the $160mn in assets repaid in the IVQ 2015 were syndicated loans the balance of Qualifying Investment Assets (and Cash) will drop from $688mn to $528mn. That's important because Non Qualified Assets will increase proportionately and would now represent 31% of Total Assets ($767mn) IF everything else is equal.
We don't know if some of the assets sold after 9-30-15 but before the announcement of its sell off of $117mn in syndicated loans made in a filing on 11-18-15 were CLO assets. At the time TICC said that between cash on its balance sheet and the $117mn from loan pay-offs they would have sufficient funds to repay the $150mnn Revolver. What we don't know is what kind of loan sales or repayments occurred before the sale of the $117mn in syndicated loans.
In any case, TICC appears to be getting very close to breaching the maximum Non Qualified asset basket. (Sean Dougherty argues that CLO values will drop to $210mn by 12-31-15 and for that reason still be within the 30% limit. He may be right, but given the number of moving parts we have only been discussing what might happen "IF everything else is equal". The more important concept is that TICC's decision to sell off syndicated assets will automatically cause CLO assets to have to drop to stay within the rules. Not only does TICC lose the income from the syndicated loans, but also from the necessarily lower CLO portfolio. As a result, the de-leveraging of the Company will result in sharply lower income, a point on which Sean and us agree. That, in turn will impact the dividend and the share value and explains why we are Short the stock.)
OUTSIDE THE BOX
This brings us to a possible alternative scenario. Maybe we are wrong to assume TICC Management (TICC 's Adviser) will seek to keep Non-Qualified Investments (i.e. CLO) within the 30% rule. Maybe TICC Management has a new game plan in mind: doubling down on CLOs. This possibility was raised by the Company itself in an unsolicited manner on the most recent Conference Call on November 7th, and before the big vote on December 22nd regarding handing over the reins to Benewfit Street Partners (NYSE:BSP).
We can't quote the whole disclosure. We recommend anyone interested reviewing the entire transcript that SA is so good to make available. However, this is a portion of what CEO Jonathan Cohen said that piqued our interest:
Given the meaningful dislocation that has occurred in the CLO market, we are starting to see a much more compelling investment opportunity set, relative to the last twelve months, especially if certain portfolios continue to differentiate themselves from a credit perspective. Since we began investing in the CLO market in 2009, we've focused on both the primary and secondary markets, and have varied our emphasis according to which we believe offered relative values at various times - better relative values at various times.
Given our active participation in both markets, we believe we have a deeper understanding of that market's trading dynamics, compared to other more recent market participants, especially in periods of market volatility. We continue to deploy our CLO investing strategy where we see opportunities to generate attractive current cash flows, and/or the potential for capital appreciation. As part of that opportunity, and because we have also seen a similarly pronounced dislocation in the CLO junior debt markets, we may more opportunistically invest in CLO debt tranches that can provide a compelling risk adjusted and absolute return. Lastly, we plan to continue to rotate out of certain older vintage CLO equity tranches, when we see an attractive bid or redemption opportunities.
During these periods of mark-to-market volatility, we continue to benefit from the locked in term financing of our CLO vehicles, which may benefit from the current wider corporate spread environment over the long run, as well as our permanent capital base, which affords us the ability to hold these investments during periods of price volatility.
Hardly sounds like a company about to reduce its CLO exposure, either as a proportion of assets or in absolute terms ! Not to speculate too wildly but if TICC keeps investing and re-investing in CLOs, that might signal the Investment Adviser's intention to forgo BDC status, in order to remain heavily invested in an asset category which they have a deep understanding of and which is capable of generating superior Return On Equity over time.
SPECULATING WILDLY ANYWAY
Of course, doubling down on CLOs and potentially transforming TICC into an entity like TICC Management's other public investment (Oxford Lane or OXLC) would be a game changer. For TICC Management that would preserve its huge management fee stream, and give them a chance (should they call the CLO market right) to reverse some or all their NAV losses over time. That might explain the huge build-up in share volume in recent days. Today (Monday January 4, 2016) share volume is 5x the normal level, less than 3 hours into the business day.
That wouldn't be good for our Short position (see below) if a deal of some kind is in the works (and some parties are already aware of the details). Anyway, we emphasize these are early morning musings, and should be taken as such.
DISCLOSURE: We are Short TICC. This Blog should be read in conjunction with our 12-30-2015 SA article: Why We Are Short TICC Capital" :seekingalpha.com/article/3780156-why-we-...
In 2016 the BDC Reporter is seeking to use SA's InstaBlog and other of the site's communication tools to provide a full picture of the BDCs that we track, whether we are Long, Short or have no position. This allows readers to follow along on BDC Reporter's company narrative through the year, and the evolution of positions taken.
This is a revised version. Based on comments by Sean Dougherty, we realized we had used the Cost value of CLO investments as opposed to FMV when discussing if the Company might breach the 30% Non Qualified basket.
Disclosure: I am/we are short TICC.
Additional disclosure: Revised version after reviewing comments made by readers.