Monday, August 22, 2011

To DRIP or Not to DRIP (Seeking Alpha Article)

I just posted a Seeking Alpha article over here that outlines BDCs and whether or not reinvesting your dividends is worthwhile.

The companies to be examined for this article will be American Capital (ACAS), Apollo Investments (AINV), Ares Capital Corp (ARCC), Blackrock Kelso Capital Corp (BKCC), Kohlberg Capital (KCAP), Main Street Capital Corporation (MAIN), PennantPark (PNNT), Prospect Capital (PSEC), Solar Capital (SLRC) and Triangle Capital Corp (TCAP).

Tuesday, August 9, 2011

BDC Weekly Roundup 8/5/2011

Between this debt ceiling debate and the S&P downgrade, things have been busy at the BDCR. Here is a quick update post.  The BDCR Index was crushed this past week with a -5.97% loss from a level of 296.91 on 7/29/2011 to 279.19 for the week ending 8/5/2011. The major winners were TCAP (+4.30%) and GAIN(+2.99%) and the major losers were MCGC(-25.31%) and AINV (-15.03%).

Chart:


News:
The markets are going crazy. I hope everyone was able to get their trades through these past few days. If I was able (cannot trade due to restricted list) to trade, I would have gone with some of the top guys from my previous article.

Good luck out there!

Wednesday, July 27, 2011

BDC Weekly Roundup 7/22/2011

Will Congress figure out this Debt Ceiling business already? They are playing with fire and worrying the market. The BDCR Index had a mixed week with a 0.53% gain this past week from a level of 312.45 on 7/15/2011 to 314.09 for the week ending 7/22/2011. The major winners were ACAS (+4.08%) and ARCC (+3.9%) and the major losers were CODI (-4.92%) and KCAP (-2.99%).

Chart:

News:
Earnings season is coming up next week, most of the BDC-R companies will report earnings.

Wednesday, July 13, 2011

A look at High Dividend Stocks (BDC / Finance) and Ranking Them

(This article will also be cross-posted on Seeking Alpha, if you read the article there and have come back here, welcome to BDCR! If not, thank you for still reading. Due to some extensive work over these past few weeks, I now have some great historical data on the BDCR companies. This post is the first of hopefully many deep dives into the companies.)


It is quite common for a major financial website to post a link of "dividend darlings". A dividend darling list typically involves a group of companies that have a strong history of paying increasing dividends over their lifespan. If you look on Forbes, Investopedia or Seeking Alpha you will see lists containing some chosen companies.
This article will include a "dividend darling" list that is exclusively focused on BDCR-followed companies. Not only will the current dividend high-rollers be highlighted, but I will rank the companies based on history and dividend coverage. All of the information gathered is available on the SEC website and/or your favorite financial website (Yahoo, Google, DailyFinance, etc). I want to reward companies that have been around for awhile and ding those that are not paying and covering their dividends. This means that a company like American Capital (ACAS), which was once the top of the heap in terms of dividend payers, will now be more towards the bottom of the list.
Below is the criteria:
  1. Is the company currently paying a dividend? I am penalizing a company that does not pay a regular dividend. I know owning ACAS over the past year with a 94% return would have been a far better total return, but I am looking at BDCs strictly on a yield-basis and not a total return basis for this article. 10 pts
  2. Does the company have a strong dividend history? For example, Prospect Capital Corporation (PSEC) likes to publicize its history of dividend increases and consecutive dividends. One thing it fails to mention is that in May of 2010, the company slashed its dividend by 10 cents per quarter, skipped most of its June dividend and changed over to a monthly payout (which overall I believe was a good thing). This list will penalize a company for doing that. 3-6 pts (3 pts for never missing a dividend, 3 pts for never cutting a dividend)
  3. Is the dividend currently covered by net investment income? I covered this in a previous post in which I explained why I believe it matters. Below you can see the updated chart. Again, the same situation applies where I multiplied a monthly dividend payer by 3 to turn it into a quarterly dividend. 3 pts
  4. How long has the company been paying dividends? I believe companies that have successfully navigated the 2007-2009 period should receive an extra credit above those companies which may have IPO'd over the past two years. 1-2 years is 1 pt; 2-5 years is 2 pts; 5+ years is 3 pts
Given this format, the max score a company could receive is 22 (5+ years of consistent dividends covered by NII) and the minimum score is 1 (company is still in business). For the BDC-R companies, the range of scores was 21 as a max and 3 as a min.
click to enlarge image
Results


Discussion of Results
As you can see, most of the companies are in the higher range of the numbers. This is partially due to the sample selection (I do not track some of the newer BDCs at the moment) and the favorable market conditions for BDC companies.
The main negative on the scoreboard was dividend cuts. Only 5 of the companies listed here have not cut their dividend. Of those 5, PennantPark Investment Corporation (PNNT - first dividend June 2007) and Compass Diversified Holdings (CODI - July 2006) have been around for awhile. Solar Capital Ltd. (SLRC - March 2010) and Horizon Technology Finance (HRZN - December 2010) are new to the world.
The other major reason for taking away points is the fact that most of the companies listed do not cover their dividend with net investment income. This means that they are either not covering their dividend or are cannibalizing their portfolio to meet payout requirements. One such company is MVC Capital (MVC). It realized losses on portfolio companies at 23 cents per share so it could meet its dividend payment of 12 cents per share. By continuing this payout, it reduced its book NAV from 17.71 to 17.38 during the six month period ending April 30th 2011.
Only 7 out of the 26 companies are "safely" covering their dividend as of their last reporting dates, which safely means their NII is greater than or equal to their current dividend. These companies are PNNT, HTGC, Kohlberg Capital (KCAP), KKR Financial Holdings (KFN), Triangle Capital (TCAP), GLAD and MCG Capital Corporation (MCGC).
The Clear Winner
PNNT (PennantPark Investment Corp) comes out ahead of the pack with a solid dividend history and good earnings numbers. It scored a 21 out of a possible 22 and the only detraction was due to the firm's lack of longevity (only paying dividends since June 2007).
The first runner up is Hercules Technology Growth Capital. There has been a fair amount of good press on HTGC this year and it appears that the company has done a good job of backing up what people are saying about it Nicholas Marshi, one of the top posters on BDC companies on Seeking Alpha, did an extensive write-up on the company in March of this year.
Surprises
Former-troubled BDC KCAP (Kohlberg Capital) is also sitting high on the list. The company was hit with a shareholder lawsuit in 2010, a changing of auditors (it switched from Deloitte to Grant Thornton) and restatement of earnings (again check the SEC website for the filings). For example, the restated as of June 30th 2009 earnings adjusted total assets down by $25m, which slashed the NAV from 11.09 to 9.73 and gave more fuel to the arguments it had with its lender BMO. It appears that the company may have weathered the storm and could be worth a deeper look into its financial statements and conference call logs.
Disappointments
At the bottom of the list is EQS. While not a BDC, EQS was a strong dividend-paying stock for 8 years and at this point it is too early to tell if the new management will be able to revitalize the company. SAR (remember GNV Investment?) is also sitting at the bottom as it has yet to show any signs of breaking out of GNV's slump.

Monday, July 11, 2011

BDC Weekly Roundup 7/8/2011

Two weeks in a row of gains. Hopefully things are going to pick up, but the current yields on these securities are attractive. The BDCR Index gained 1.68% this past week from a level of 312.63 on 7/1/2011 to 316.56 for the week ending 7/8/2011. The major winners were NGPC (+8.36%) and KED (+7.73%) and the major losers was MCGC (-0.48%).

Chart:

News:
I will have an extended article up this week concerning dividends. It seems like the BDC companies have been in the spotlight (along with REITS) on the major news sites these past few weeks.
HRZN - Releases outlook - http://www.horizontechnologyfinancecorp.com/releasedetail.cfm?ReleaseID=589294
KED - Schedules earnings release - http://biz.yahoo.com/bw/110706/20110706006188.html?.v=1
MAIN - Closes a new $155m revolver with BB&T - http://www.bizjournals.com/tampabay/news/2011/07/08/bbt-extends-deal-to-main-street.html?ana=yfcpc
PSEC - Closed another $105m in investments (good to see they are putting that money to work)
TTO - Acquired a 40% interest in a PNM subsidiary - http://biz.yahoo.com/e/110706/tto8-k.html

Wednesday, July 6, 2011

BDC Weekly Roundup 7/1/2011

I hope everyone had a great 4th of July weekend. The posts have been coming a much slower rate due to me working on some new ways to source data. My current process is too time consuming and does not allow me to do the kind of in-depth analysis I would like to do.

The BDCR Index fought back and rose 2.31% this past week from a level of 305.41 on 6/27/2011 to 312.63 for the week ending 7/1/2011. The major winners were KED (+10.21%) and ACAS (+9.30%) and the major losers were EQS (-1.25%) and TCAP (-1.12%).
Chart:

News:
ACAS - Raising money through another stock, AGNC - http://seekingalpha.com/article/276766-mreit-american-capital-agency-s-secondary-provides-a-19-yield
KED - Boosts dividend by 22.6% and the stock soars - http://finance.yahoo.com/news/Kayne-Anderson-Energy-bw-2437001925.html?x=0&.v=1
NGPC - Announces new CFO - L. Scott Biar

Wednesday, June 22, 2011

BDC Weekly Roundup 6/17/2011

Been a busy few days here, but wow this is a rough market.

The BDCR Index had a slid another -1.47% this past week from a level of 309.35 on 6/10/2011 to 304.81 for the week ending 6/17/2011. The major winners were NGPC (+6.08%) and CODI (+5.52%) and the major losers were EQS (-6.30%) and MCGC (-5.51%).

Chart:


News:
ACAS - CEO Malon Wilkus buys 11,5000 shares, Senior VP Brian Graff unloads 926 shares
EQS - New board was elected without issues. - http://finance.yahoo.com/news/Equus-Announces-Results-of-iw-1454894910.html?x=0&.v=1
FSC - Releases newsletter - http://ir.fifthstreetfinance.com/phoenix.zhtml?c=216346&p=irol-newsArticle&ID=1572963&highlight=
Also, their CEO Leonard Tennebaum bought 10,000 shares on 6/14.
KCAP - Declares second quarter dividend of 17 cents (unchanged)

Motley Fool article on FSC and other BDCs - http://www.fool.com/investing/general/2011/06/18/is-fifth-street-finance-the-perfect-stock.aspx A bit ironic considering FSC (and of course PSEC) just did an equity raise this week.

Tuesday, June 14, 2011

BDC Weekly Roundup 6/10/2011

I am back! The test was difficult and I feel they did a poor job of testing the curriculum, but onwards and upwards.

The markets have been getting pummeled since my last post. The S&P 500 has declined about -3.96% and the BDCR Index has mirrored the decline by a -3.21% decline over that time as well. For the past week, the BDCR declined by -1.42% from a level of 313.81 on 6/3/2011 to 309.35 for the week ending 6/10/2011. The major winners were KCAP (+2.84%) and SLRC (+2.77%) and the major losers were TINY (-7.18%) and TTO (-5.74%).

Chart:


New:
No news articles this week, will restart those next week and begin content again.

Wednesday, May 11, 2011

BDC Weekly Roundup 5/6/2011

(EDITOR's NOTE: I will be on a reduced schedule for the next few weeks due to a certain exam. After that exam I intend on posting actual content and analysis with regularity again)

The BDCR Index had a downward slide this past week by an amount of -2.84% from a level of 328.66 on 4/29/2011 to 319.61 for the week ending 5/6/2011. The major winners were TCAP(+5.26%) and KFN(+1.19%) and the major losers were FSC (-8.03%) and EQS (-6.24%).

Chart:

Tuesday, May 3, 2011

BDC Weekly Roundup 4/29/2011

The BDCR Index had a nice recovery this past week by an amount of 2.46% from a level of 320.59 on 4/22/2011 to 328.664 for the week ending 4/29/2011. The major winners were CODI (+9.26%) and BKCC (+7.90%) and the major losers were TTO (-0.93%) and GLAD (-0.44%).
Chart:

News:
This week is earnings release week! Will post with any major news.

Wednesday, April 27, 2011

Monroe Capital Corp - Another New Filing

(This post is also being published on Seeking Alpha - either as an Instant Blog or real article)


Monroe Capital Corp filed papers to register as a BDC on March 3rd, they just recently filed amended papers on April 19th (N-2/A) for their shelf statement (correcting a typo in the original filing and increasing the fees). This new BDC is a division of Monroe Capital, a smaller private lender that was established in 2004 and currently manages around $440mm. There is an "MCAP" (Mango Capital) traded on the OTC BB, so for this stock, they went with "MRCC" instead (all of the good M tickers are taken). There is a backlog of new BDCs to profile and that raises a concern. We all know from Porter's 5 Forces that Barriers to Entry is a key driver for a company maintaining superior returns. It appears the SEC registration process is no longer a barrier for a number of smaller CLO/PE managers and the potential returns are worth the effort. Will this increased competition hurt some of the other BDCs? Only time and the 10-Qs will tell.


Organization
The company will use Monroe Capital BDC Advisors, LLC (MCAD), an entity formed for the purpose of serving as investment advisor. MCAD will provide MRCC with investment professionals and portfolio selection. Interestingly, they will also use another LLC - Monroe Capital Management Advisors (MCMA), LLC to serve as the administrator. The two entities mean that expenses are split - MCAD will receive the management and performance fees and MCMA will bill MRCC the proportional share of expenses. This setup is slightly different from other external managers and it may result in additional expenses, but there is no way to know how this setup will affect returns.


People in Charge
The investment decisions will be led by Theodore L. Koenig and Daniel M. Duffy. Theodore Koenig is a former lawyer, coming from the defunct firm of Holleb & Coef. After Holleb, he was president and CEO of Hilco Capital. Daniel M. Duffy comes from a more traditional finance background by way of CapitalSource and GE Capital. From what I can find on Mr. Duffy via his old CapitalSource bio:

Mr.
Duffy has over 21 years of experience in corporate finance providing both debt and equity capital to companies in a wide range of industries. Mr. Duffy has been with CapitalSource since April 2003. Prior to joining CapitalSource Mr. Duffy was managing director in charge of GE Capital's debt placement team. Mr. Duffy joined GE Capital via its acquisition of Heller Financial where he spent 12 years acting in a number of leadership roles including co-head of the media lending team senior credit officer in corporate finance senior credit officer in equipment finance and team leader in loan workouts. Prior to joining Heller Mr. Duffy received his B.S. in accounting from Northern Illinois University in 1984. 

The filing also mentions that 18 professionals from Monroe Capital will also be supporting the firm. There will be no direct employees.


Fees
This is something interesting to note. In the original filing (glad I did not post this last week), the management fees were stated as 1%, as of the 4/19 filing, management fees are stated as: "calculated at an annual rate equal to 2% of our total assets (which includes cash, cash equivalents and assets purchased with borrowed amounts)." The inclusion of cash and cash equivalents makes this one of the higher management fees. The first part of the incentive fee is 20% of Net Investment Income subject to an 8% annual hurdle rate.
The first, payable quarterly in arrears, equals 20% of our pre-incentive fee net investment income (including interest that is accrued but not yet received in cash), subject to a 2% quarterly (8% annualized) hurdle rate and a “catch-up” provision measured as of the end of each calendar quarter. Under this provision, in any calendar quarter, MC Advisors receives no incentive fee until our net investment income equals the hurdle rate of 2% but then receives, as a “catch-up,” 100% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 2.5%. The effect of this provision is that, if pre-incentive fee net investment income exceeds 2.5% in any calendar quarter, MC Advisors will receive 20% of our pre-incentive fee net investment income as if a hurdle rate did not apply. The first component of the incentive fee will be computed and paid on income that may include interest that is accrued but not yet received in cash.
The second part is:
The second part is determined and payable in arrears as of the end of each fiscal year in an amount equal to 20% of our realized capital gains, if any, on a cumulative basis from inception through the end of the year, computed net of all realized capital losses on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fees.

This is similar to other BDCs like BKCC where a huge liability may be payable at the end of the year and introduce some seasonal earnings into the 10-Q analysis. One other note - Monroe is also looking to pay up to 50% of the fee (pursuant to SEC approval) in MCBDC stock.

Portfolio Composition
The company expects to invest most of the proceeds of the IPOunitranche or junior-secured. The firm
expects to make investments in the $5mm to $25mm range, but maintains that range may drift as the firm's capitalization increases. As per the filing, the initial portfolio will have these statistics:
  •   Loans with a weighted average yield of 7% to 8%;
  •   Emphasis on middle market transactions;
  •   Minimum of 90% senior debt investments (including unitranche debt);
  •   Maximum concentration of 15% in any one industry;
  •   Average loan position of less than $5,000,000; and
  •   Loans with maximum loan-to-enterprise value ratio of between 50% to 70%


Risks
Standard risks are outlined here. The N-2/A has a lengthy list of risks as well that are worth reading.

I will keep everyone updated as this company moves along and IPOs.

Tuesday, April 26, 2011

BDC Weekly Roundup 4/22/2011









The BDCR Index had a slight loss this past week by an amount of -0.13% from a level of 321.00 on 4/15/2011 to 321.00 for the week ending 4/22/2011. The major winners were ARCC (+3.12%) and EQS (+3.03%) and the major losers were TINY (-2.90%) and TCAP (-2.79%).

Chart:

News:
CODI - Some insider transactions - http://www.sec.gov/cgi-bin/own-disp?action=getissuer&CIK=0001345126
FSC - Releases annual letter - http://finance.yahoo.com/news/Fifth-Street-Finance-Corp-pz-3301990663.html?x=0&.v=1
HTGC - Closes $75m convertible offering
MCGC - Sells stake in Avenue, realizing $51.4m in proceeds (not return) - http://www.bizjournals.com/washington/news/2011/04/18/mcg-capital-sells-stake-in-avenue.html
PSEC - Adds two new lenders, increases Revolver - http://finance.yahoo.com/news/Prospect-Capital-Announces-iw-3521834156.html?x=0&.v=1

Monday, April 18, 2011

BDC Weekly Roundup 4/18/2011

The BDCR Index continued the downward slide this past week by an amount of -1.17% from a level of 324.75 on 4/8/2011 to 321.00 for the week ending 4/15/2011. The major winners were CODI (+1.14%) and FSC (+1.15%) and the major losers were HTGC (-6.18%) and KCAP (-4.67%).

Chart:


News:
ARCC - Closes an $86.5 mm investment
BKCC - Motley Fool calls BKCC a "perfect stock" and gives it a 7 out of 10 score. Wow. - http://www.fool.com/investing/general/2011/04/15/is-blackrock-kelso-capital-the-perfect-stock.aspx
FSC - Closes convertible offering, CEO Leonard M. Tannenbaum purchases $2m in concurrent private offering.
GAIN - Ups dividend by 12.5% - http://finance.yahoo.com/news/Gladstone-Investment-prnews-3583817188.html?x=0&.v=1
HTGC - Joins the convertible party with a $75 million senior notes offering. Changes articles of incorporation to increase maximum share issuance from 60mm to 100mm.
TTO - Downgraded by Ladenburg Thalmann

Thursday, April 14, 2011

TPG Specialty Lending Appoints a New CEO

I am not sure why I have been focusing on this company so much, but it has been fun to follow a BDC from origination through the IPO.

TPG has picked Michael  Fishman, age 48 to be the CEO and act as a director for the company, effective April 1, 2011. He brings to the firm a wealth of experience (over 20 years) and in his role at Wells he served as a leader in the division responsible for providing senior secured financing to middle-market firms in the range of $10mm-$750mm.

It appears that Michael also served on the Board for the American Bankruptcy Institute until 2005 and is active in some local Los Angeles charities.

It is hard to find some of the deals he has worked on but it appears most of his deals would be in the sweet spot for TPG.

Random google results on him:
Michael's LinkedIn Profile
Condo bought in San Fran

Wednesday, April 13, 2011

Prospect Capital (PSEC) - What a Difference a Year Makes

(Author's note: I originally started this post with the goal of highlighting some of the changes PSEC has made to their company over the past year. In light of their recent equity raise - a private offering of 9 million shares at a market price destroying $11.40 a share maybe the management of PSEC still is learning. To be fair, the offering does add to Book Value. Although their continued practice of announcing "good news" and trying to sneak in some "bad news" does not sit well. The only way you can find the current pricing of the offering is to go into the SEC filing that I linked above.)

It has been just over a year since Prospect Capital's attempted acquisition of Allied was denied by Allied's management in one of the most eviscerating letters you will see written by a public company . Let us review some of the highlights:
  • As a result of this review, Allied’s Board of Directors has unanimously concluded that this revised offer does not constitute, and is not reasonably likely to result in, a “Superior Proposal” as defined under our merger agreement with Ares Capital Corporation (“Ares” or “ARCC”). Allied’s Board of Directors has unanimously reaffirmed its recommendation that Allied shareholders vote for the transaction with Ares announced on October 26, 2009.
Allied added the bold for emphasis.

  • During our discussions, Prospect made claims to have access to a significant amount of third party capital. While we were intrigued by these references, Prospect was unwilling to disclose any details, including the identity of the mysterious capital source, nor was Prospect willing to provide any information regarding the financial outline of a potential transaction.
Allied called Prospect out for their lack of transparency in the transaction and refuted the idea that Prospect had been an actual suitor. It is interesting to note that ARCC never increased their takeover offer in response to PSEC.
  • We believe Prospect’s unsolicited offer does NOT provide Allied shareholders “Superior Value” as compared to the Ares transaction.
PSEC had made an offer that on its surface was at a premium to ARCC's offer. At the time of PSEC's revised offer to acquire ARCC, the transaction would have resulted in a 20% premium over ARCC's offer. Allied noted that after this offer was made, PSEC's stock dropped more than 5% and eroded the premium. In front, most of the market knew that taking over Allied would have been too much for PSEC to handle. After the offer was withdrawn, PSEC's stock price rebounded.

  • We believe a merger with Allied would put Prospect’s dividend at risk, resulting in a near term dividend cut, which would reduce Prospect’s stock price and imply a lower value for Allied’s shareholders
For PSEC to complete this transaction, they would have to more than double the current share count. Given PSEC's eroding Net Interest Income, the only way to maintain the dividend would be to pay out of Capital Gains realized upon completion of the merger and asset write-ups. At the time of the offer, PSEC was already underfunding their dividend by 50%. In retrospect, the management team at Allied was correct and PSEC cut the dividend in May from 41 cents a quarter to 10 cents per month (25% reduction per quarter + they "skipped" the Q2 dividend by only paying 10 cents, although the change to monthly does provide a salve). Further underscoring the lack of transparency, the management team at PSEC hid this dividend cut in another news release discussing Q4 results. The market did not take this news well and the stock dropped another 10% in the aftermath.
  • We believe Prospect lacks the managerial expertise to run the combined company.
This one is calling a spade a spade. Allied acknowledged PSEC was still in the "Junior Varsity" of the BDC league and would have a difficult time handling the merger. While this may or may not be true, PSEC did have a much smaller investment/support staff and they would have tripled their investment portfolio.
  • There is no assurance that any agreement with Prospect could be reached or closed
Allied knows PSEC has not done its research and any delays would only hurt shareholder value. Also, Allied had already agreed to pay ARCC a $30mm "break-up" fee if the merger did not come to pass (it dropped to $15mm if the ALD shareholders had voted against ARCC).

  • We believe Prospect has limited liquidity to operate the combined business
Ares (ARCC) had more relationships and available credit lines to draw than PSEC. Since that time PSEC and ARCC have both reorganized their debt structure. For example, PSEC's revolver is now is one-month LIBOR plus 325 basis points, subject to a minimum LIBOR floor of 100 basis points as opposed to 400 basis points with a floor of 200 basis points.

  • We believe the Prospect management platform is inferior to the Ares management platform, providing weaker long term growth opportunities for Allied’s shareholders. Allied’s Board has no confidence in Prospect’s ability to manage the assets in Allied’s portfolio.
Again, this is basically saying PSEC was not ready for the big-time yet.

  • We believe the acquisition of Patriot Capital further weakens Prospect’s platform, making Prospect a less attractive merger partner.  
There is always the risk of taking on too much at once. Allied and Ares were already down the line with regards to integrating their firms with ARCC purchasing the unitranche fund in November 2009. While these steps may call into question if Allied would have considered another offer from any BDC, PSEC was still working on integrating the PCAP assets at this time.

  • Prospect has a track record of highly dilutive equity capital raises which we do not believe provides responsible growth to shareholders.
Most BDCs at the time were issuing shares below NAV that were dilutive to shareholders. This was the nature of the beast in 2009-2010 before capital markets reopened. The below chart (care of PSEC's Prospectus) shows the dilutive issues.

  • We believe, by combining with Prospect, Allied shareholders would be inheriting a much riskier portfolio.
Prospect had recently acquired the PCAP portfolio, which if you had the chance to review before the acquisition was head scratching at best (one investment made prior to PCAP going under was in a hot-tub maker even though the recession had already taken hold). Prospect's management has turned the portfolio around and as of December 31, 2010, about 2.3% of the net assets were on non-accrual (as opposed to 6.8% as of the Allied letter).

Allied management closed the letter with a unanimous "No" against PSEC and the ARCC merger went through as of April 1st 2010.

    Tuesday, April 12, 2011

    BDC Weekly Roundup 4/8/2011

    The BDCR Index had a small loss this past week by an amount of -0.27% from a level of 325.61 on 4/1/2011 to 324.75 for the week ending 4/8/2011. The major winners were TTO (+2.48%) and NGPC(+2.33%) and the major losers were PSEC (-4.68%) and KCAP (-3.87%).

    Chart:


    News from the past week:
    BKCC - Earnings release AND call on May 9th. I suppose they would prefer investors not have time to really dissect the 10-Q this time...
    FSC - Issued $150m in convertible notes with a conversion price of $14.76 and an interest rate of 5.375%
    GAIN - Sale of $5.6m equity investment in Cavert and reinvestment into Subordinated Debt - http://www.gladstone.com/article.php?q=%3FModule%3DMediaViewer%26GUID%3D18077006%26Ticker%3DGAIN
    PSEC - Publishes updated earnings guidance, new investment disclosures and sneaks in a secondary. They priced the offering at 11.40 which was highly below the current price, but accretive to Book Value - http://www.sec.gov/Archives/edgar/data/1287032/000104746911003314/a2203200z497.htm 

    Monday, April 4, 2011

    BDC Weekly Roundup 4/1/2011

    The BDCR Index enjoyed a healthy gain this past week by an amount of 2.11% from a level of 318.75 on 3/25/2011 to 325.762 for the week ending 4/1/2011. Note, the index is still below the high set on February 22nd 2011 of 337.57. The major winners were ACAS (+8.12%) and TCAP (+5.54%) and the major losers were GAIN (-3.06%) and NGPC (-2.97%).

    Chart:


    News items from this past week. Looks like the first week of May will be a busy earnings season:
    ARCC - Earnings release scheduled for 5/3.
    KCAP - Seeks to win shareholder approval to issue shares below NAV (common in 2009), but Nicholas Marshi disagrees - http://seekingalpha.com/article/261391-dubious-feelings-about-kohlberg-s-equity-raising-plan
    KED - Increases dividend from 30 cents to 31 cents per share - http://finance.yahoo.com/news/Kayne-Anderson-Energy-bw-736572173.html?x=0&.v=1
    PNNT - Earnings release scheduled for 5/4.
    SLRC - Earnings release scheduled for 5/2.

    Tuesday, March 29, 2011

    BDC Weekly Roundup 3/25/2011

    The BDCR Index enjoyed a slight gain this past week by an amount of 1.26% from a level of314.725 on 3/18/2011 to 318.75 for the week ending 3/12/2011. The major winners were KCAP(+8.22%) and TINY(+7.44%) and the major losers were SAR (-5.07%) and MAIN (-4.95%).

    Chart:

    News for the week:
    ACAS - Lots of "For Sale" Rumors - http://seekingalpha.com/article/260156-american-capital-strategies-appears-poised-for-purchase
    ARCC - Prices convertible offering of $200m - http://www.snl.com/irweblinkx/file.aspx?IID=4092627&FID=10939606
    KCAP - Declares 1Q dividend of 17 cents
    MAIN - Secondary offering of 3.5million shares at 18.35 - http://www.bizjournals.com/houston/news/2011/03/22/main-street-capital-prices-shares-for.html?ana=yfcpc
    PSEC - Making some new investments - http://www.snl.com/IRWebLinkX/file.aspx?IID=4092630&FID=10928102

    Monday, March 21, 2011

    BDC Weekly Roundup 3/18/2011

    The BDCR Index extended last week's losses and fell this past week by an amount of -2.64% from a level of 323.26 on 3/11/2011 to 314.725 for the week ending 3/18/2011. The major winners were HRZN(+1.25%) and PSEC (+0.51%) and the major losers were TICC (-8.64%) and TCAP (-8.11%).

    Chart:

    News from the past week:
    BKCC - Seems like everyone has been talking about them
    Slow week otherwise for BDCs, most of the major firms released their 10-K financials and you can find those online at EDGAR.

    Thursday, March 17, 2011

    Blackrock Kelso Capital BKCC - What now?

    BKCC missed its expected quarterly earnings by over 70% and since then the stock has taken a pounding to the tune of over 20%.

    Many different sites have already documented this occurrence, but it appears Blackrock's Advisor is putting its money behind the company - BlackRock Kelso Capital Advisors LLC bought 200,000 shares through a private placement, but it includes information on restricted stock that was already granted to him. At best this is a mixed signal, would be a lot more interesting if the CEO / CIO was making the purchase.

    See this link for the full Form 4 filing.

    Wednesday, March 16, 2011

    TPG Specialty Lending - Update

    TPG Specialty Lending (TPGM) filed an amended 10-12G as well as an 8K today with the SEC.  I am still reviewing the amended 10-12G and if I see anything material will post it here. The 8K was signed by Vice President Ronald Cami, a former Skadden Alum (read more about him here).

    Some things of note:
    • TPG Specialty Lending has a CIK with the SEC - 0001508655
    • The Administrator (TSL Advisers) will be reimbursed by TPGM for "certain initial organization and operating costs up to an aggregate of $1.5 million." TSL has already stated the costs have exceeded that amount, so the $1.5 million will be expensed right away.
    • The initial agreement will remain in effect until March 15th, 2013 and will be subject to yearly renewal after that.
    More to come

    Tuesday, March 15, 2011

    BDC Weekly Roundup 3/11/2011

    (Was out last week) The BDCR Index took a tumble fell this past week by an amount of -3.76% from a level of 335.45 on 3/4/2011 to 323.26 for the week ending 3/11/2011. The major winners were TTO (+8.44%) and HRZN (+0.75%) and the major losers were BKCC (-20%) and TINY (-11.71%).

    Chart:

    
    Notable News Items:
    BKCC - Misses earnings, reports Q4 EPS of 03 cents, expected 11 cents. Link to the CC - http://phx.corporate-ir.net/phoenix.zhtml?p=irol-eventDetails&c=209952&eventID=3753698
    CODI - Raises dividend from 34 cents to 36 cents. Reports Q4 EPS of 48 cents, meeting consensus.
    KCAP - Posts positive surprise EPS of 24 cents versus expected 17 cents. Link to the CC - http://ir.kohlbergcap.com/eventdetail.cfm?eventid=93480
    Also releases/prices convertible notes - http://finance.yahoo.com/news/Kohlberg-Capital-Corporation-pz-3295497930.html?x=0&.v=1
    MCGC - Selling portfolio company Superior Industries for $42.3mm http://finance.yahoo.com/news/MCG-Capital-Announces-Sale-of-bw-3869544465.html?x=0&.v=1
    NGPC - Misses earnings, reports 15 cents per share versus estimate of 17 cents. http://finance.yahoo.com/news/NGP-Capital-Resources-Company-pz-3932944371.html?x=0&.v=1
    FSC - Closed $182mm in new investments YTD - http://finance.yahoo.com/news/Fifth-Street-Finance-Corp-pz-1930631458.html?x=0&.v=1
    MAIN - Raises dividend 4% (from .125 to .13)
    MVC - Reports 1Q losses of 26 cents, misses the 3 cents estimate. Link to 1Q presentation - http://www.mvccapital.com/eventdetail.cfm?eventid=41339
    TICC - Met earnings estimates - CC details - http://www1.snl.com/irweblinkx/corporateprofile.aspx?IID=4089666

    Motley Fool link on BKCC/MVC - http://www.fool.com/investing/general/2011/03/09/blackrock-kelso-capital-shares-plunged-what-you-ne.aspx

    Monday, February 28, 2011

    BDC Weekly Roundup 2/25/2011

    The BDCR Index fell this past week by an amount of -1.04% from a level of 337.57 on 2/18/2011 to 334.08 for the week ending 2/25/2011. The major winners were GAIN (+3.73%) and NGPC (+3.11%) and the major losers were KFN (-6.04%) and EQS (-4.79%).

    Chart:

    News from around the way:
    New BDC IPO'd, falls in debut - SUNS - http://seekingalpha.com/article/254218-solar-capital-ipo-analysis?source=yahoo
    ARCC - Good article on Ares balance sheet changes - http://seekingalpha.com/article/255232-ares-capital-bolsters-its-balance-sheet?source=yahoo
    FSC - Expands credit facility to $215 million - http://ir.fifthstreetfinance.com/releasedetail.cfm?ReleaseID=552281
    TCAP - Declared dividend of 42 cents/share

    Tuesday, February 22, 2011

    BDC Weekly Roundup 2/22/2011

    The BDCR Index edged out a nice gain last week by an amount of  2.01% from a level of 330.92 on 2/11/2011 to 337.57 for the week ending 2/18/2011. The major winners were ACAS (+10.77%) and EQS (+6.18%) and the major losers were CODI (-5.27%) and TINY (-2.94%).


    Chart:
    Some quick notes on the chart, I have changed the scale from the average value to show the actual value. This has changed the slope of the line at a few points as the average values were at a different scale from the actual.

    Some notable news items:
    It appears this week was the week for key person turnover. Two BDC CEOs are leaving their posts, definitely worth monitoring this development.
    ACAS - 4Q results top expectations. Still no dividend guidance though - http://finance.yahoo.com/news/American-Capital-4Q-results-apf-1937421312.html?x=0&.v=1
    CODI - CEO Joe Massoud to take a leave of absence - http://finance.yahoo.com/news/Compass-Diversified-Holdings-prnews-2769409108.html?x=0&.v=1
    FSC - Coverage initiated by FBR Capital
    GAIN - Downgraded by Hilliard Lyons from Buy to Neutral
    KFN - Earnings call transcript - http://seekingalpha.com/article/253666-kkr-financial-ceo-discusses-q4-2010-results-earnings-transcript?source=yahoo
    MCGC - Will gain $50.4MM from sale of Avenue Broadband - http://www.bloomberg.com/news/2011-02-16/mcg-capital-to-get-50-4m-from-broadband-unit-sale.html
    NGPC - John H. Homier (current CEO and President) will step down - http://finance.yahoo.com/news/NGP-Capital-Resources-Company-pz-3731910545.html?x=0&.v=1
    PSEC - Added to S&P 600 SmallCap (see previous post). Priced out their $172.5mm (upsized from 150) convertible senior notes - http://seekingalpha.com/news-article/598332-prospect-capital-announces-pricing-of-150-million-of-5-5-5-5-year-unsecured-convertible-senior-notes-due-august-2016

    Thursday, February 17, 2011

    Prospect Capital (PSEC) to join SmallCap 600

    I was intrigued by this headline as it is always exciting when a member of the BDC Index joins a major index. The S&P SmallCap 600 Index (as taken from their website):

    The S&P SmallCap 600 covers approximately 3% of the domestic equities market. Measuring the small cap segment of the market that is typically renowned for poor trading liquidity and financial instability, the index is designed to be an efficient portfolio of companies that meet specific inclusion criteria to ensure that they are investable and financially viable.

    The purpose of this index is to take a sample of the Small Cap (market capitalization of between $250mm and $1.2b) market and provide investors exposure to the universe of these stocks. Some of the qualifications (aside from market capitalization) include liquidity (at least 250,000 share volume), domicile (US), public float (at least 50%) and financial viability. The inclusion into this index should be fairly beneficial to current shareholders of PSEC (or if you were fortunate enough to buy a day before S&P published the announcement). Below is an extremely crude look at other stocks and some technical analysis on them. This is NOT A RECOMMENDATION TO BUY OR SELL.

    Some sample recent additions to the S&P SmallCap 600 and their performance:


    As you can see, not every addition produces a winner, but it is safe to say for the next few days PSEC's stock price should trend upward with the majority of the volume trades happening this week. If we ignore ATNI (which had a number of other issues at the time it was added to the index), the average performance boost from A-3 to A+2 (this upcoming Tuesday) is 2.42%, this means the expected close is 12.08 for PSEC.

    Tuesday, February 15, 2011

    BDC Weekly Roundup 2/14/2011

    The BDCR Index edged out a slight gain last week by an amount of 0.15% from a level of 330.41 on 2/4/2011 to 330.92 for the week ending 2/11/2011. The major winners were TINY (+14.15%) and ACAS(+2.89%) and the major losers were TCAP (-5.93%) and PNNT (-3.01%).

    Chart:

    Some notable news items:
    AINV - Downgraded by Ladenburg Thalmann to neutral http://www.americanbankingnews.com/2011/02/08/apollo-investment-corp-ainv-downgraded-by-ladenburg-thalmann-to-neutral/
    GLAD - Declared NII of 22 cents per share - Seeking Alpha transcript http://seekingalpha.com/article/251506-gladstone-capital-ceo-discusses-f1q2011-results-earnings-call-transcript
    PNNT - Public secondary offering of 8m shares at 12.40
    PSEC - Declares next 3 months of dividends, 10.115, 10.1175, 10.12 cents per share. http://finance.yahoo.com/news/Prospect-Capital-Reports-iw-2071863640.html?x=0&.v=1
    PSEC - Will be added to S&P SmallCap 600 Index - http://finance.yahoo.com/news/Standard-Poors-Announces-prnews-1222046055.html?x=0
    TCAP - Public secondary offering of 3m shares at 19.25
    TTO - Declared an dividend of 10 cents per share, estimated to be all return of capital http://finance.yahoo.com/news/Tortoise-Capital-Resources-bw-1891515772.html?x=0&.v=1

    Friday, February 11, 2011

    Risks of a BDC

    When I reviewed the TPG 10-12G, I was interested in all of the risks the company stated. If you review each of the BDC's filing documents, you should see most of the same risks for each firm. One big difference will be if a firm is Externally or Internally managed (future post). An externally-managed firm has an outside entity responsible for the investment decisions and/or the firm's operations. In that way, the BDC is just a shell company. There are two main categories of risk, Systematic and Unsystematic Risk. Feel free to look those terms up, but below I will discuss the unsystematic risk. An investor in a BDC is taking on unsystematic risk with the goal of higher returns.

    Types of Risk Specified

    Operational Risk
    General risk that is inherent in running a business. This risk arises from the people and processes the firm employs in its day to day existence. Some common risks often mentioned in here are:
    • Agency Risk - The principals in the firm may not act in the best interests of Shareholders. Common cases - a manager choosing to invest in a firm because they like the business (say Facebook) when there are other more profitable investments out there.
    • Legal/Regulatory Risk - The firm's activities may expose themselves to lawsuits. The firm may invest in an affiliated company, harassment suits, etc. Regulatory Risk means a change in laws/regulations may materially impact the firm's profitabilty and even ability to survive
    • Fraud - The firm's employees may misappropriate funds, mistate financial statements to seem more profitable, an employee discloses the portfolio holdings of a company to another firm.
    • Disasters - There may be a natural disaster, terrorist attack or even corruption of a firm's computer networks (someone accidentally pulled the plug)
    • Other - fat finger data entry, missed reporting deadlines.
    In terms of TPG, the risks they mention are:
    • We are a newly-formed company with no operating history
    • We will be dependent on upon management personnel of the Advisor for our future success
    • The Adviser and its management have no prior experience managing a BDC
    • Even in the event the value of your investment declines, the Management Fee and, in certain circumstances, the Incentive Fee will still be payable 
      • A number of externally managed BDCs (see ARCC, AINV, etc) charge a Management Fee. This means even if the firm is losing money, part of that loss will be from this charged Management Fee. This is pretty standard for most funds, but as we saw in the most recent down-turn, it can greatly hurt the firm to have these external fees during a recovery. In the future, I will comb through the other major BDCs and try to come up with a fee structure chart for comparison.  
    • The Adviser can resign on 60 days' notice. We may not be able to find a suitable replacement within that time, resulting in a disruption in our operations that could adversely affect our financial condition, business and results of operations. 
      • If TPG resigns, this BDC will be closing or in the process of being acquired. This is a standard risk of management (Agency risk)
    • Regulations governing our operation as a BDC affect our ability to, and the way in which we, raise additional capital.
    • Changes in laws or regulations governing our operations may adversely affect our business.
    • We will operate in a highly competitive market for investment opportunities
    • Our Board may change our investment objective, operating policies and strategies without prior notice or stockholder approval.
      • Again this is a little disconcerting, but still a standard disclosure. However, this should point out to any potential shareholders that companies can change their investment focus and that change may or may not be a good thing. On the positive side, this does allow the BDC to be more agile than other mutual funds with a set mandate and respond to market conditions. 

    Financial Risk (Investment Risk+)
    This is the general term for any type of risk that deals with a company's ability to meet financial obligations (pay debt, employees, etc). In addition to this definition, I am going to include the investment risks here. These risks eventually role up to the financial risk and will help determine the company's viability. Some common risks often mentioned here:
    • Inflationary Risk - The risk is not so much that there will be inflation or not, the risk is in the substitution effect. For example, if inflation is higher than expected and wages do not match inflation, consumers may substitute going out to the movies with just renting a movie and watching at home. For a BDC, they incur this type of risk depending on their portfolio investments.  
    • Capital Risk - Risk that an investor may lose all or part of their investment. An individual investor assumes this risk on two levels since the BDC may suffer capital losses
    • Timing Risk - A BDC may have to sell an investment before it matures or suffers a loss. This is usually minimized as a BDC is required to hold securities to maturity.
    • Interest Rate Risk - Interest rates are variable and depending on the BDC's financing and investment structure, the BDC may be exposed. For example, BDC ONE issues a Term Loan A to Company XYZ that matures in 5 years for $50MM at an fixed interest rate of 8%. BDC TWO issues a Term Loan A to Company 123 that also matures in 5 years for $50MM at a floating rate of LIBOR+500bps. At the time of issuance, BDC ONE is receiving a higher return. However, the economy booms over the next two years and LIBOR is now 500 bps. Since BDC ONE is only getting a 10% rate, it is now receiving a lower rate of return than BDC TWO that issued a floating rate security (the same is true in downturns, this is why a number of new issuances have floors in them).
    • Credit Risk - An issuer may miss or default on payments, be downgraded and/or break a covenant. This applies to a BDC with regards to their line of credit and to their investments.
    • Liquidity Risk - The porfolio companies are by definition non-public entities and the market for their securities is small. This means the BDC may be forced to take a loss if it needs to dispose of investments (see ACAS).

    There are more categories and classifications, but this post is already getting too long. In terms of TPG, the risks they mention are:
    • We will be subject to corporate-level income tax if we are unable to qualify as a RIC under Subchapter M of the Code.
      • This risk could be on either side of the fence (operational/investment), but the main risk is that the company does not pay out the required amount in dividends to prevent their own taxation. If the company does have to pay income taxes, it would most likely hurt the ability for the company to meet other obligations.
    • There is a risk that you may not receive dividends or that our dividends may not grow over time. 
    • You may be subject to filing requirements under the 1934 Act as a result of your investment in the Company.
    • You may be subject to the short-swing profits rules under the 1934 Act as a result of your investment in the Company.
    • Potential conflicts of interest could impact our investment returns.
    • We may borrow money, which may magnify the potential for gain or loss and may increase the risk of investing in us.
    • To the extent that we do not realize income or choose not to retain after-tax realized capital gains, we will have a greater need for additional capital to fund our investments and operating expenses.

    Monday, February 7, 2011

    BDC Weekly Roundup 2/7/2011

    The BDCR Index rose again last week by an amount of 1.11% from a level of 326.74 on 1/28/2011 to 330.41 for the week ending 2/4/2011. The major winners were EQS (+11.38%) and KCAP (+9.62%) and the major losers were GLAD (-3.60%) and FSC (-0.11%).

    Chart:


    Some notable news items:
    ACAS - Sells triVin for $11m gain
    EQS - Sells three equity investments for $10m to a Fund
    FSC - Closes share offerings, declares monthly dividends of 10.66 cps.
    PNNT - Increases quarterly dividend to 27 cents http://www.sys-con.com/node/1700862


    Monday, January 31, 2011

    BDC Weekly Roundup 1/31/2011

    The BDCR Index reclaimed last week's losses and rose by an amount of 3.88% from a level of 314.07 on 1/21/2011 to 326.74 for the week ending 1/28/2011. The major winners were TINY (+11.53%) and FSC (+10.81%) and the major losers were GAIN (-5.61%) and GLAD (-0.26%).

    Chart:


    Some notable news items:
    FSC - Upgraded by Stifel Nicolaus, issues 10million shares today
    MCGC - Renews $150m secured credit facility - http://www.streetinsider.com/IPOs/MCG+Capital+%28MCGC%29+Secures+$150M+Secured+Warehouse+Cradit+Facility+Renewal/6235033.html
    PSEC - Makes another large investment - http://finance.yahoo.com/news/Prospect-Capital-Provides-282-iw-2812588062.html?x=0&.v=1
    TINY - Portfolio company BioVex to be acquired - http://biz.yahoo.com/e/110124/tiny8-k.html

    Wednesday, January 26, 2011

    A Look at Dividend Coverage

    Overview
    The Dividend Coverage Ratio is a way to measure how "safe" a dividend is for a firm. For a BDC with a required minimum payout (to avoid taxes), this ratio becomes a little more meaningful. As you can see below, some BDCs will pay out more in dividends than they earned in their current quarter's Net Investment Income.

    There are many formulas out there, but this site will use these formulas:

    DCR  = Net Investment Income / Current Quarterly Dividend.

    DC = Net Investment Income - Current Quarterly Dividend

    I am using Net Investment Income because a BDC is required to have at least 70% of their holdings in qualified securities / cash. These investments are the life-blood of a BDC and while many firms generate fee income from structuring deals, these are more volatile. One other note, if a firm pays out dividends on a Monthly basis, I am adding together the past three months of dividends to get the amount. The second formula is useful because it shows you how much room a firm has to pay out its dividend

    In the below chart, I have pulled the NII from the BDCR Index and compared that value with their current dividend payouts. In cases where NII is negative, the DCR will also be negative, this allows us to sort the results.


    Results




    Discussion of Table


    As you can see, a large number of the firms are operating at the razor's edge when it comes to their payout ratio. While this is nice for fixed income investors, it may mean that a company is actually paying out their dividends at the expense of the firm. If a company cannot cover the dividend with investment income, it needs to generate the proceeds from another source(s).

    • The first source would be from capital gains on the sales of a firm's assets. This dividend is good for a tax-paying investor in the short-term as it will be classified as a return of capital and taxed (in the US) at the long-term capital gains tax-rate (15% for most people, for the IRS view, please click this link). Return of capital dividends do require you to adjust your cost basis for your position though and that may not be desired from a book-keeping standpoint. For a BDC, this type of dividend payment may be bad as the firm has presumably sold off an income generating asset to meet a payout requirement. 
    • A second source would be from the company tapping their Revolving Credit Facility (Revolver) to get the cash to payout to their investors. Again this may be a bad sign for the firm as they are increasing their interest expense and leverage without any offsetting gain.
    • The final source is when a firm actually goes "Ponzi" and will begin issuing new shares to pay-off old shares. This does not happen on a large scale for long; most firms will cut their dividend or violate a lender covenant if they are in this situation. But, a good example would be AINV for 2008, you can see that their asset values and net investment income were tumbling, but the firm maintained its dividend and partially funded this dividend with proceeds from selling shares. AINV was not the only BDC to do this, but they are an easy target as they are still one of the largest.
    A firm that has a DCR over 1 or a DC > 0 is a firm that is currently covering its dividend with its investment proceeds and that may be a sign of a responsible management team. There are some firms that are close to their ideal payout (KCAP for example) that may be correcting their balance sheets, but you should take a look at their dividend and NII history to come to your own conclusions. The best firms in terms of dividend coverage are KFN (which is not a BDC) and MVC. The worst are the firms that have already cancelled their dividend.

    Monday, January 24, 2011

    BDC Weekly Roundup 1/24/2011

    The BDCR Index fell a fair amount by -3.16% from a level of 324.01 on 1/17/2011 to 314.07 for the week ending 1/17/2011. The major winners were SAR (+6.63%) and KFN (+2.54%) and the major losers were NGPC (-8.08%) and CODI (-6.37%).


    Some notable news items:
    ARCC - Priced their convertible notes - http://www.streetinsider.com/Corporate+News/Ares+Capital+%28ARCC%29+Prices+$500M+Convertible+Senior+Notes+Offering/6225298.html
    AINV - Typical of their sibling, Apollo and Ares are doing the same thing - http://www.marketwatch.com/story/apollo-investment-corporation-prices-offering-of-175-million-of-senior-convertible-notes-due-2016-2011-01-20
    KED - Declares a 4th Q dividend of 30 cents/share - http://finance.yahoo.com/news/Kayne-Anderson-Energy-bw-110007750.html?x=0&.v=1

    Interesting article from a new linked site, BDC Reporter on Seeking Alpha - http://seekingalpha.com/article/247649-business-development-companies-changing-approach-to-balance-sheet-risk

    Thursday, January 20, 2011

    TPG Special Situations - New Guy on the Block

    On January 14th, TPG Specialty Lending, Inc., the Special Situations division of Private Equity giant TPG Capital filed a 10-12G (Initial Form for General Registration of Securities, aka IPO overview) with the SEC. Judging by available tickers and what other companies have been doing, I assume they are going to go with "TPGM" (TPG Management, there already exists a TPG Capital, the parent) and for the sake of brevity I will refer to them as that for the rest of this post.

    Organization
    The company will use TSL Advisers (affiliate of TPG Capital) as the investment adviser and enter into an "Administration Agreement" with them. This means TPGM will essentially outsource all functions to them. TSL will provide the new firm with investment professionals, investment decisions, facilities and reporting functions. The new firm will operate very much like other externally managed BDC's such as Ares Capital (ARCC) and Apollo Investment (AINV).

    People in Charge
    The investment decisions will be led by Co-CIOs Alan Waxman and Joshua Easterly, both former Goldman Sachs employees. Mr. Waxman was the co-founder of the Goldman Sachs Specialty Lending Group (GSSLG) and Mr. Easterly is a former co-head of that group. The statement also stipulates that they have a team of over 20 dedicated professionals. The Board of Directors will be at the time of IPO only 5 people, where at least 3 people cannot be "interested persons" of the Company. The document states that the firm does not intend to ever have any direct employees.

    Fees
    This is where the filing gets interesting. An externally managed BDC is usually setup by the external manager as a way of increasing fee income. In a way, it is a publicly-traded CLO where the equity can be held by anyone. The manager collects a management fee + a performance fee. TPG Capital will collect a 1.5% management fee of the Company's average total gross assets of of the end of the quarter. Until the IPO, TPGC will not collect a fee and for the first two quarters the fee will be based on the quarter-end gross assets.
    The performance fee will have two components. It is best to copy/paste directly from the filing on this one. "(i) Following an IPO, the first component of the Incentive Fee will equal 100% of the excess (if any) of pre-Incentive Fee net investment income over a 1.5% quarterly (6% annualized) hurdle rate, until the Adviser has received 17.5% of total net investment income for that quarter, and 17.5% of all remaining pre-Incentive Fee net investment income for that quarter. No Incentive Fee will be payable under this component for any quarter in which pre-Incentive Fee net investment income does not exceed the hurdle rate for that quarter. Prior to an IPO, the first component of the Incentive Fee payable by the Company will be subject to a reduced rate.
         “Pre-Incentive Fee net investment income” means dividends (whether or not reinvested), interest and fee income less operating expenses, calculated on an accrual basis.
         (ii) Following an IPO, the second component, payable at the end of each fiscal year in arrears, will equal a percentage, which we refer to as the “Weighted Percentage,” of the cumulative capital gains from the inception of the Company to the end of such fiscal year, minus the aggregate amount of any previously paid capital gain Incentive Fees for prior periods; but in no event will be less than zero. The Weighted Percentage will be calculated at the end of each fiscal year of the Company that occurs following an IPO and is intended to ensure that the portion of the Company’s capital gains that accrued following an IPO will be subject to an incentive fee rate of 17.5% and the portion of the Company’s capital gains that accrued prior to an IPO will be subject to a reduced rate. The Weighted Percentage will be calculated in the manner set forth in the Advisory Agreement, the form of which is filed as Exhibit 10.1 of this Registration Statement. Prior to an IPO, the second component of the Incentive Fee payable by the Company will be subject to a reduced rate.
    “Cumulative capital gains” means, on any relevant date, cumulative realized capital gains, less the sum of (a) realized capital losses and (b) unrealized capital depreciation on investments, in each case as of such date. "
    In normal person terms - this means they will collect 1.5/17.5 (kind of like a hedge fund 2/20 standard), with a quarterly high water mark of 1.5% on the NII + they get a kicker at the end of the year based on Capital Gains.
    Portfolio Composition
    Like most of the other BDC companies, TPGM will focus on senior secured loans, first and second lien, some unitranche loans (this post does a nice job of explaining), some mezzanine loans, structured equity and even straight equity/warrants.  Most of the equity instruments will be hand in hand with another more senior investment.

    Private Offering
    Prior to the IPO, the company will have private offering with a number of investors that provided seed capital. The company will structure the private offering like a Private Equity fund where investors will make an initial capital commitment and drawdowns (capital calls) will take place. These initial shareholders will not be able to sell their stock until the restrictions are lifted. The release condition would be for TPGM to have an IPO that results in the Company having a common stock float of at least $75 million or for the fourth anniversary of the private closing to have passed. TPGM has also reserved the right to offer a board seat to a member of the initial private subscription group.

    Stated Risks
    This could easily be another post, but I will list the main bullet points here

    • We are a newly-formed company with no operating history
    • We will be dependent on upon management personnel of the Advisor for our future success
    • The Adviser and its management have no prior experience managing a BDC
    • Regulations governing our operation as a BDC affect our ability to, and the way in which we, raise additional capital.
    • We may borrow money, which may magnify the potential for gain or loss and may increase the risk of investing in us.
    • We will operate in a highly competitive market for investment opportunities
    • Even in the event the value of your investment declines, the Management Fee and, in certain circumstances, the Incentive Fee will still be payable (No matter what, TPG will get paid)
    • We will be subject to corporate-level income tax if we are unable to qualify as a RIC under Subchapter M of the Code.
    • There is a risk that you may not receive dividends or that our dividends may not grow over time. 
    • You may be subject to filing requirements under the 1934 Act as a result of your investment in the Company.
    • You may be subject to the short-swing profits rules under the 1934 Act as a result of your investment in the Company.
    • Potential conflicts of interest could impact our investment returns.
    • Our Board may change our investment objective, operating policies and strategies without prior notice or stockholder approval.
    • Changes in laws or regulations governing our operations may adversely affect our business.
    • The Adviser can resign on 60 days' notice. We may not be able to find a suitable replacement within that time, resulting in a disruption in our operations that could adversely affect our financial condition, business and results of operations. 
    • To the extent that we do not realize income or choose not to retain after-tax realized capital gains, we will have a greater need for additional capital to fund our investments and operating expenses.

    So there you have it. I encourage anyone who would like to know more about a BDC to read as many 10-12G filings as possible as this provides you with a great look into how the firm was organized (most of these filings have some copy/paste to them) and it provides a number of definitions in it.

    Tuesday, January 18, 2011

    BDC Weekly Roundup 1/17/2011

    The BDCR Index rose by 1.65% from a level of 318.66 on 1/10/2010 to 324.01 for the week ending 1/17/2010. The major winners were TINY (+11.14%) and NGPC (+7.17%) and the major losers were MVC (-3.64%) and KFN (-2.9%).



    Some notable news items:
    ARCC - Increases capital committed to its SSLP fund http://finance.yahoo.com/news/GE-Capital-and-Ares-Capital-bw-1554288246.html?x=0&.v=1
    GAIN / GLAD - Elected Jack Reilly elected to Board and selects David Watson as CFO http://www.streetinsider.com/Analyst+Comments/Gladstone+Capital+Corporation+Elects+Jack+Reilly+to+its+Board+of+Directors/6211001.html
    http://www.cnbc.com/id/41044729
    TINY - Coverage initiated by Research 2.0 http://seekingalpha.com/article/245846-harris-harris-grows-big-on-small-technologies
    TTO - Wants to deregister as a BDC and own Real Assets (not just investment securities) http://finance.yahoo.com/news/Tortoise-Capital-Resources-bw-161869629.html?x=0&.v=1

    TPG Special Situations group intends to register as a BDC
    http://www.reuters.com/article/idUSN1420292320110114?feedType=RSS&feedName=privateEquity&rpc=43

    Thursday, January 13, 2011

    Net Investment Income Addendum

    Someone pointed out to me that I failed to mention what the below line represents:

    Interest income from cash and cash equivalent investments
     
    This line item for most companies will include true Cash that is sitting in an account and assets that are readily convertible into cash. This second category is more fluid than Cash. For most firms, CE will be money market holdings, short-term government bonds (DEVELOPED countries), US Treasury Bills and Notes, highly liquid securities and commercial paper with Investment Grade Ratings. For example, MSFT commercial paper may be considered Cash Equivalent while Lehman CP would not. Some firms like to get more exotic in their cash equivalent definition by including duration (bonds), time to maturity, if the issuer of the debt (bond/loan) is a GSE and the list goes on and on.

    Thank you for reading and welcome to all new readers!