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.

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:

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.

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%

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%).


CODI - Some insider transactions -
FSC - Releases annual letter -
HTGC - Closes $75m convertible offering
MCGC - Sells stake in Avenue, realizing $51.4m in proceeds (not return) -
PSEC - Adds two new lenders, increases Revolver -

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%).


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. -
FSC - Closes convertible offering, CEO Leonard M. Tannenbaum purchases $2m in concurrent private offering.
GAIN - Ups dividend by 12.5% -
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%).


    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 -
    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 - 

    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%).


    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 -
    KED - Increases dividend from 30 cents to 31 cents per share -
    PNNT - Earnings release scheduled for 5/4.
    SLRC - Earnings release scheduled for 5/2.