The announcement: New Mountain Finance Corporation announced today that it has priced (at the market open of 10-25-16) an underwritten offering of 5,000,000 shares of its common stock at a public offering price of $13.50 per share. The Company's investment adviser, New Mountain Finance Advisers BDC, L.L.C. (the "Adviser"), has agreed to bear the sales load payable to the underwriters. In addition, the Adviser has agreed to pay the underwriters an additional supplemental payment of $0.25 per share, which reflects the difference between the actual public offering price of $13.50 per share and the net proceeds of $13.75 per share received by the Company in this offering.
BDCs want to add to assets under management to grow their income. But there are times when NAV is too dang close to the current share price for a secondary offering to be accretive to NAV. If BDCs want to do secondaries - then management need to be doing more to pay for those secondaries.
This is the second time this year that management has proved an 'assist'. The first instance: "Ares Capital Management LLC, which serves as the investment adviser to Ares Capital (NASDAQ:ARCC), Ares Management will provide $275 million of cash, or $1.20 per fully diluted share, to American Capital shareholders at closing (of the upcoming merger). In addition, Ares Management has agreed to waive up to $100 million in Part I income based fees (ARCC Income Based Fees) payable for the ten calendar quarters beginning the first full quarter following the closing of the transaction, in an amount of up to $10 million of ARCC Income Based Fees to the extent earned and payable to Ares Capital Management in such quarter, to support the expected profitability of the combined company during the integration and portfolio repositioning period for the two businesses."
The lesson - if management does something questionable to raise AUM - complain. We are in a different environment. BDCs have historically done things (acquisitions and secondary offerings) for management while hurting their BDC shareholders (example - Fifth Street). We now have two examples of BDC management giving a material assist to transactions that may be marginal in their benefit to shareholders while being substantial in their benefit to management. This is the way it always should have been.
BDC investors need to bookmark these two events in their brain. The next questionable transaction - we need to ask "where is management's contribution?". Unless BDCs have completely changed their stripes, there will be upcoming questionable transactions. And we did not have to wait long for one.
On 10-26-16 Gladstone Capital Corporation (NASDAQ:GLAD) announced that it has entered into an agreement to sell 2,000,000 shares of its common stock at a public offering price of $7.98 per share, raising approximately $16.0 million in gross proceeds and approximately $15.1 million in net proceeds after payment of underwriting discounts and commissions and estimated expenses of the offering payable by the Company.
15.1/16.0 = 94.375%
94.375% times $7.98 = $7.53
Q2-16 NAV was $7.95
Given those numbers, I would have the expectation that the equity raise harms NAV per share - and that is always a bad thing. This is an example of a BDC that is screwing the existing shareholders to add AUM (assets under management) that will benefit management. Existing shareholders of GLAD need to be complaining - loudly. Forty-two cents per share of this equity raise should be paid by management - so the equity raise would be NAV neutral.
Disclosure: I am/we are long ARCC.