Here are the main news items and SEC filings from all the publicly traded BDCs that the BDC Reporter tracks for Wednesday April 5, 2017 at 1:30 p.m EST. External links to articles or filings are in blue, internal links to BDC Reporter's prior posts on the subject are in red. Where appropriate, we add brief comments. Again, this was a heavy news day, with a multitude of issues big and small worth noting.
Fifth Street Finance (FSC) and Fifth Street Senior Floating Rate (FSFR): Announces departure of Patrick Dalton CEO.
In a shock announcement, Fifth Street Asset Management, affiliates of which serve as the Investment Advisors to FSC and FSFR, announced the immediate departure-for reasons unstated-of very new CEO Patrick Dalton from the helm of both BDCs and his replacement with old FSAM hand Bernard D. Berman. In a separate SEC filing, it was noted that Mr Dalton has resigned as Director as well. The BDC Reporter has commented on the subject in a Word From The Editor column.
TICC Capital (TICC): Announces pricing of Unsecured Notes Due 2024.
As we mentioned yesterday, TICC went to market to issue a Baby Bond with a maturity of 7 years (2024). In the press release, we learned that the BB was priced at 6.5%, and with the underwriter's over-allotment TICC will raise about $65mn on April 12th. The earliest redemption date-at the BDC's option-is March 2020. The ticker is TICCL. The proceeds will not be sufficient in and of themselves to repay the $95mn in TICC Convertible Notes, but with cash accumulated from recent asset sales, TICC should have no repayment problem. Going forward, the cost of debt will be 1% lower on $65mn, but that benefit will be offset in the short term by the costs of arranging the new Baby Bonds.
SCM has announced its intention to issue new shares, partly to raise funds to capitalize a new SBIC subsidiary. The BDC Reporter-whose track record at guessing who's about to raise new equity and who is just shuffling paperwork at the SEC is about 50/50-projected yesterday that SCM appeared to be preparing itself for an equity raise. (And/or a debt raise. We like to hedge ourselves). We were wondering if SCM would "take the money and run": the answer apparently was yes. Subsequent to the initial filing SCM priced just over 3.1mn shares at a price of $14.10. The stock price has come off its recent high of $14.57, a very modest drop off after a secondary and another sign that market conditions remain red hot.
TPG Specialty Lending (NYSE:TSLX): Announces date of IQ 2017 earnings release.
"TSLX will release its financial results for the first quarter ended March 31, 2017 on Wednesday, May 3, 2017, after the market closes. TSLX invites all interested persons to its webcast / conference call on Thursday, May 4, 2017 at 8:30 a.m. Eastern Time to discuss its first quarter ended 2017 financial results".
The BDC has been performing well, both on a fundamental basis and from a stock price point of view. Even after coming off a recent high spike, TSLX is at a price level not seen in nearly three years and at a substantial premium to Net Asset Value. Can an equity raise be far behind ? The BDC Reporter discussed the BDC's recent Convertible Offering in January 2017. That might be all the capital the $1.6bn (assets) BDC needs for the moment. Still, the window is open…
Triangle Capital (TCAP): Filed Form 4 for Dunwoody Mc Com, Independent Director.
Mr Dunwoody, who serves as an independent director of TCAP, sold about 1/3rd of his shareholding in the internally managed BDC for a price of $18.6 on April 3, 2017. He is left with 106, 278 shares. TCAP has been trading well off its 1 year stock price high of $21.25, but substantially above the 52 week low too.
TCRD shareholders are being asked to vote on multiple subjects. First, all the Board members (including newly appointed Admiral Edmund P. Giambastiani, Jr. who was just appointed in 2016) are up for re-election. Second, the BDC (which really means the Investment Adviser) is asking for the right to issue stock below NAV. Third, the right to issue Convertible Debt or warrants at a price not less than the current stock price but below NAV. Fourth, the right to adjourn the meeting to seek additional Proxies if there are not enough votes for a quorum.
The BDC Reporter has taken a first look at the Proxy and is impressed that TCRD has an independent director as the Chairman, and that independent directors apparently form a "supermajority". That's unusual for a BDC, where the sponsoring asset manager usually likes to maintain the sort of control we see in well run dictatorships.
We're less impressed that the directors waved through on March 7, 2017 the current Investment Advisory Agreement for another year, without any push back about the Investment Advisor's continued receipt (albeit at a reduced level) of Incentive Fees even as the BDC's Net Asset Value has dropped sharply, its distribution been reduced and its stock price has dropped 43% since the height on November 2013. At the very least the Board should have negotiated a multi-year waiver of the Incentive Fee, which was $4.5mn in 2016, and $23mn in the two years prior on a combined basis.
Yet, the Investment Advisor is asking shareholders to potentially allow below NAV stock issuance for shares equal to up to 25% of the current shares outstanding. As always in these situations we ask why the Investment Advisor cannot manage the need to maintain 200% asset coverage of debt (one of the reasons given for potentially raising new capital) by shrinking its portfolio rather than adding to an already problematic portfolio. Nor is it helpful for TCRD's shareholders-should they agree to the provision as they most certainly will-to have a Sword of Damocles of a potentially much lower priced stock issue or warrants hanging over them for another year.
As with so many other BDCs controlled by AUM hungry asset management organizations whose principal motivation is asset accumulation rather than fund performance, we couldn't help noticing the TH Lee organization appears to have very little of its own capital invested in TCRD. The Proxy only lists groups or individuals with a holding of 5% or more. Only the famous Leon Cooperman falls in that category, with a 5.56% stake which the great investor might be regretting given what we've said about the dividend cut, 43% price drop, etc. No word on any ownership by the organization or the principals at the firm whose name is on the door. To round out the picture without further comment: The co-CEOs of TCRD (that's a whole subject to itself) own 156,000 shares between them, some likely tied to their compensation arrangement with TH Credit. The "independent directors" hold just over 50,000 shares.
If the Investment Advisor believes in the benefit of potentially raising equity below NAV, the BDC Reporter would be much more convinced if the parent organization signed up for a goodly amount of the capital involved, rather than continuing to receive an Incentive Fee while losing money hand over fist and leaving to shareholders the full burden of growing capital committed.
It's especially disconcerting as the credit troubles that have burdened TCRD are by no means resolved. The Investment Advisor has implicitly admitted as much by constantly adding key personnel in recent months; changing the procedures for deal selection and admitting in filings that further decreases in NAV may be possible.
The BDC Reporter's own analysis has cast doubt about whether there may be further credit losses coming and even another reduction in the distribution. In our opinion, the principal focus of the BDC should be on turning round its investment portfolio over a multi-quarter period and bringing down operating costs (yes, we're back to those Incentive Fees, but also operating expenses which do not seem to shrink however much larger the THL Credit platform seems to grow), rather than leaving the door open to additional capital raises. The very viability of the TCRD business model is in question after two years of reverses, much change in senior personnel, a still damaged investment portfolio and an in-progress shift in strategy to lower risk-lower return assets than has included jettisoning all CLO investments and may result in a materially lower portfolio yield. This is a period when the independent directors of the BDC (who are handsomely compensated to the tune of $127,000 to $148,000 a year) need to stand up for shareholders and ensure that everything is being done to protect their interests. Unfortunately, this Proxy suggests that TCRD is in a "business as usual" mode.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: Our sister company has a position in FSC, SCM and TCRD's Baby Bonds