July 12, 2016
Ex-Private Equity Manager turned Hedge Fund Manager
BDC ACTIVIST SHORT: Is Alcentra Capital Raising Non Accretive Debt Capital ?
The BDC Activist reports on new issuance of medium term, unsecured Notes by Alcentra Capital (ABDC) at all-in rates around 6.5%. We question the benefits to shareholders-if any-from issuing this debt capital given the high interest rate paid, the ensuing cost in management and incentive fees and other factors. Part of a general trend in the BDC sector of raising Non Accretive Capital.
- Mid-sized BDC Alcentra Capital (ABDC) continues to raise debt capital with its its Inter Note program.
- Between June and July 9 raised $7mn issuing 2021 Notes with stated rates of 6.25% and 6.375%, plus offering costs.
- Unsecured Notes outstanding now reaching $50mn, equal or greater than outstandings under Revolver at 3.76% cost.
- BDC Activist questions net benefits to common stock shareholders from greater exposure to expensive Notes.
- ABDC : Generates 12.0% yield but 15% of assets in non-income producing equity & 15% of interest income in non-cash form (PIK/OID).
- After paying 1.75% management fees, incremental operating costs, interest/cost of Notes & incentive fee, net return only 2.2%
- On a cash basis, net return to shareholders for assets purchased with Notes even lower at 0.6%.
- When BDC Activist figures in bad debt provision of 2% per annum, shareholder return minuscule to negative over long term.
- By our count 20% of ABDC assets funded with Inter Notes effectively generate very poor/negative returns for shareholders.
- However, the assets generate $900K in annual Management Fees and over $500K in Incentive Fees.
- Typical example of differing economics between Manager and shareholders in a BDC.
- Key Issue: Non-Accretive Capital
- Disclosure: Parent of BDC Reporter/Activist Southland Capital Management: long Inter Notes. No position in common stock.
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