Nicholas Marshi
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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