BDC News Of The Day: May 3, 2017

Here are the main news items and SEC filings from all the publicly traded and non-traded BDCs that the BDC Reporter tracks for Wednesday May 3, 2017, completed way after the market close. (External links to articles or filings are in blue, internal links to BDC Reporter’s prior posts on the subject are in red. Where appropriate, we add brief comments).  At the crack of dawn, the BDC Reporter faced the first round of IQ 2017 earnings reports. We managed to read the earnings releases of all the BDCs involved and three out of four 10-Q filings, but quickly realized we could not cover the waterfront by our usual time of late morning Pacific Time. There are just too many items – not all of them earnings releases- to complete in a normal time (usually 4-5 hours). Instead,  we wrote an initial assessment of the earnings releases in our Word From The Editor column to give our readers that second opinion which we see as the BDC Reporter’s principal function. We’ve sprinkled portions of that analysis in the BDC News Of The Day below. Moreover, we’ve put in some overtime after the close  (and prices rocked and rolled for the first time in a while as the two BDC sector ETN and ETF with the tickers BDCS and BIZD moved down (1.70%) and (1.77%) respectively). We’ve completed our initial work and caught up where we can with Conference Calls and presentations made during the course of the day.

Solar Capital (SLRC): Announced IQ 2017 Earnings. SLRC also filed its 10-Q for the period.

From Word From The Editor: ” SLRC saw its NAV Per Share increase by 1 cent over the prior year. Total assets have increased. Credit quality appears to have improved (with our standard and just mentioned disclaimer). However, Net Investment Income Per Share went nowhere at $0.39. A year ago, the number was $0.40. Last quarter, SLRC was at $0.42. No good deed goes unpunished. Last year a portion of the Incentive Fee was being waived, this quarter: no more. As a result, earnings are flat.”

That wasn’t enough for the market which caused SLRC’s stock price to drop (3.7%), albeit from a multi-year high level.

Solar Senior Capital (SUNS): Announced IQ 2017 Earnings.

Here’s what we wrote before the open:  “Net Investment Income is at exactly $0.35, just enough to cover the distribution. However, that’s been achieved – again – by having the External Manager waive some of its fees.  Any future increase in SUNS Net Investment Income is likely to go first to the patient External Manager. We note, no spread compression showing up here as yet, but there are many moving parts with the financially engineered greater yield achieved by both BDCs joint ventures. The bigger theme at Solar might be how both seem to be running just to stand still in terms of portfolio size, even when all the different JVs and finance companies they own are taken into account. Competition in lending shows up not only in loan spreads but in the difficulty of keeping portfolio assets from running off on a net basis”.

The SUNS stock price dropped, but less than SLRC and less than the market: by (0.7%). SUNS – t00 – is at a 3 year high.

Horizon Technology Finance (HRZN) : Announced IQ 2017 Earnings and Announced IIIQ 2017 Monthly Distributions.HRZN also filed its 10-Q for the period.

Here’s what we wrote before the open:

“The tech BDC’s NAV is flat from the prior period (technically up 2 cents). However, behind that is a ($10mn) Realized Loss from writing off two failed investments, which is offset by an Unrealized Appreciation of a similar level as this was already in the cards. The remaining credit portfolio looks like it might be in better shape in dollar terms, but we suspect the weaker credits still remain. We won’t know etc. What the BDC Reporter is more concerned about (although these issues are all related) is that much of reported Net Investment Income appears to be in non-cash form. That will mean distributions will have to be funded out of the cash balance (which is a healthy $43mn). Availability under the Revolver is minimal, despite a lower asset base. Moreover that facility expires in a year and the Baby Bonds in two years. Finally, Net Investment Income Per Share is already tracking below the dividend liability.

Unfortunately, we’re putting HRZN on our Possible Distribution Cut Watch List for the next 12 months, not that long after the monthly pay-out was reduced to $0.10 from $0.15. Looking at the portfolio it seems unlikely that the cavalry will arrive either from higher yields (the current nominal yield-the way HRZN counts) is 15.5% already; or from a large number of equity realizations that can be turned into yield investments. Note Holders of the Baby Bond with the ticker HTF -which our parent company holds – might want to keep an eye open over the medium term”.

Ares Capital (ARCC): Announced IQ 2017 Earnings And Distribution.

Here’s what we wrote before the open:

“The BDC that might disappoint the most in the short term, and might see a stock price pull-back (so hard to know), is ARCC. Now that American Capital’s assets have been acquired, so have its shareholders and there are more dividend mouths to feed. Add to that the first obvious evidence of spread compression going on (something that the BDC Reporter has been warning about for months now) and you’ll see ARCC’s self appointed metric of Core Earnings Per Share is down well below its dividend level and prior period levels. The BDC is talking  confidently about having levers to pull to get earnings up in the future, so no panic yet in the C-room at Ares Management (the External Manager). Credit quality seems in good shape but there the devil is really in the details, so we’ll wait for the BDC Credit Reporter to perform its  portfolio investment-by-investment review before hoisting any banners. Still, NAV was exactly the same as a year ago and all of 5 cents higher than last quarter.”

Postscript: ARCC also filed its 10-Q for the period, the first quarterly filing following the acquisition/merger with American Capital. Late in the day on May 3rd, ARCC’s Conference Call transcript was published on Seeking Alpha. The BDC Reporter has reviewed the latter -although portions are unintelligible or simply amusing- but not the former as yet.

As we write this after the close, we were right about the stock price movement. ARCC was down (4.22%) on the day, and volume was nearly 4x the average. We appear to be on the same page as many of the analysts (which as a self appointed contrarian surprises us) about the impact of spread compression. ARCC itself was reasonably candid that loan yields were being pressured by a highly competitive lending environment.  In fact, the Investment Advisor was decidedly critical of unnamed other market participants driving down spreads and loosening covenant protections.

The earnings release shows that the overall portfolio yield dropped from 8.3% to 8.1% at cost in a quarter. However, there were other yield statistics sprinkled throughout ARCC’s presentations. For example, the Investment Advisor made much of the 6.7% yield on the acquired American Capital portfolio. Plus, on the Conference Call, the CEO mentioned that the winding down JV with GE Capital (that’s the “SSLP”) was only yielding 6.5%, from 7.0% previously, and more than 50% down from its height.  This is all summed up by the CEO in this way:

Our total portfolio yield has declined since the end of the fourth quarter primarily due to the higher amount of non-yielding securities from the American Capital portfolio and the continued decline in the yield on our SSLP subordinated certificates.

We’d say that was an over-simplification as there are many, many moving parts here including the (also discussed) lower contribution from fee income; stagnation at the new JV (this is the “SDLP”); lower yields on new loans being booked; the impact of having more non-income producing assets on a proportional basis and wild card issues like CLO earnings and distributions from Ivy Hill; the impact of higher LIBOR rates and we’re just getting going.

However, what the BDC Reporter found surprising is how skeptical several analysts seemed on the Conference Call Q&A about ARCC’s ability to be able to once again generate recurring income (i.e. Net Investment Income) in line with, or in excess of, the current $0.38 quarterly distribution. That pay-out was announced as unchanged for the IIQ 2017, but the analysts did not seem convinced. Each of the august institutions the analysts represent have sophisticated financial models which may be flashing warning signals, and that could be the cause of the doubts that were being expressed when the Investment Advisor took questions. We’re not used to ARCC –  usually the darling of most firms covering the stock – being shown such  concerns about dividend sustainability.

We won’t minimize the analysts apparent concern – especially as we haven’t a financial model of our own to counter with. (We are investing with a multi-year outlook and find the innumerable variables involved make any numbers spit out of a well meaning Excel calculation unreliable at best). This is the key “Wall of Worry” shareholders will have to climb up or down in the next few quarters where ARCC is concerned: will the Number One BDC’s current dividend be sustained ? However, we don’t share the concern and we are not placing ARCC on the BDC Reporter’s world famous Possible Distribution Cut Watch List. (We’ll be working withe copywriters for a punchier title). It’s not that we don’t believe there is yield compression going on in leveraged lending, because there is and that will continue to squeeze earnings for many quarters to come. Nor do we believe ARCC is going to get its earnings up by throwing caution to the wind and taking on substantially more risk in its investments to boost returns.

Mostly, we “buy” the Investment Advisor’s argument – repeated patiently several times throughout the Conference Call- that ARCC has a number of avenues to offset the erosion of income in some portions of the portfolio with boosts elsewhere and/or reduction in expenses. We wouldn’t dare to presume to run through all of them here, but suffice to say the Investment Advisor has well over a dozen ways to boost Net Investment Income Per Share that we could think of (some of which are covered above), not to mention the natural reduction in expenses that will come from the one-time costs of acquiring ACAS running down to next to nothing in the IIQ of 2017. How do you eat the ACAS elephant ? One bite at a time. As the Investment Advisor reminded listeners, the Allied Capital acquisition (like any successful acquisition) did not reveal all its benefits in a quarter or two. It took several years for ARCC to fully realize all the gains associated from acquiring one of its largest peers and the same will be true here.

The BDC Reporter does not want to sound like Pollyanna, nor do we ever take any External Manager completely at their word, but there’s not enough evidence to yet suggest that the IQ 2017 Net Investment Income level is – in any way- a harbinger of what is to come over the next year. A few months ago when we were noodling around with ARCC’s numbers we came away with a pro-forma Net Investment Income of $1.60 per share annually. Stubbornly, that remains our view. We will revert in a year (mark your calendars !) and we shall assess.

TICC Capital (TICC): Announced IQ 2017 Earnings Conference Call Date.

TICC Capital Corp announced that it will hold a conference call to discuss first quarter 2017 earnings on Monday, May 8, 2017 at 9:00 AM. The toll free dial-in number will be 1-888-339-0740. There will be a recording available for 30 days. If you are interested in hearing the recording, please dial 1-877-344-7529. The replay pass-code number is 10106761.

The BDC Reporter will be fascinated to see what TICC reports about CLO earnings after months of loan compression in the large cap lending market.

Gladstone Capital (GLAD): Announces Conference Call Details

Hercules Capital (HTGC): Announces Expansion Of Team.

HTGC – one of the most successful BDCs out there and a leader in venture lending – announced the hiring of 5 senior professionals for a variety of roles. HTGC has expanded its ambitions in recent years, including a telling name change, even if the ticker remains the same. We reviewed the backgrounds of the individuals involved, and were suitably impressed. Of course, the BDC Reporter always worries. In this case, we do wonder when HTGC will reach the boundaries of its own BDC niche (even one that has been expanded in scope) and will face the law of diminishing returns from an investing standpoint while facing ever increasing personnel costs.

Main Street Capital (MAIN) : Announced Distributions For IIIQ 2017.

The Most Popular BDC announced monthly distributions that were unchanged from the prior period. Some investors may have hoped for a small increase to the monthly pay-out (which is supplemented by two semi-annual payments), but that was not forthcoming.

MAIN recently hit its All Time High of $40.39, but has slipped ever so slightly to under $40.00 (by one cent).

In Other News: A Capital Southwest (CSWC) filed a Form 4 reporting selling 500 shares under an automatic sales program a week after doing the same transaction, as we reported previously. No big deal, but 1,000 shares out of 39,000 owned by this CSWC Director have been cashed in under this program in the two transactions. Of course, CSWC had been trading at a high point till a few days ago, but has dropped off by about 5%.

Also, PennantPark Floating Rat e (PFLT) announced an unchanged monthly distribution of $0.095 for the month of May. The BDC seems to be in a groove and no dividend cut seems imminent.

TriplePoint Venture Growth BDC (TPVG) announced its earnings release date will be May 9th after the close.

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