Capitala Group: Sells Portfolio Company

“Capitala Finance Corp. (“Capitala” or the “Company”) (Nasdaq:CPTA), a provider of capital to lower and traditional middle market companies, is pleased to announce that it recently fully exited its debt and equity investments in Medical Depot, Inc. (”Drive Medical”), a leading global manufacturer and distributor of durable medical equipment.

On January 3, 2016, the Company exited its investment in Drive Medical and received $21.0 million for its equity and senior subordinated debt investments. Capitala was repaid at par $14.7 million for its senior subordinated note. In addition, the Company received $6.3 million for its equity investment, netting a realized gain of approximately $5.0 million with a cumulative cash-on-cash return of 4.7x.

“Our investment was a great opportunity to work with an excellent management team that was passionate about their mission, fully knowledgeable of their market space, and was able to effectively execute multiple, complex, international acquisitions in a short time frame,” stated Joe Alala, III, Chairman and CEO of Capitala. “We are excited to kick off 2017 with such a successful exit and a healthy appetite to continue investing in quality opportunities.”

From the press release.

On the first business day of the new year, Capitala Finance (CPTA) booked a significant-but not unexpected-win.

As the press release says, the portfolio company was sold for proceeds of $21.0mn.

However, at September 30, 2016, the BDC had valued its debt and equity at $21.35mn.

As a result, there is not going to be any boost to Net Asset Value when this deal is recorded in the IQ of 2017 filing.

Still, the Realized Gain on the equity portion of the deal will go a fifth of the way to make up for a dismal year for CPTA.

Through nine months of 2016, the BDC had recorded Realized Losses of -$24.9mn.

Everything else being equal that would still leave CPTA with -$19.9mn  in Realized Losses in 2016, versus Net Investment Income of about $30mn.

Going forward, from an income point of view, the repayment of the Medical Depot 14.0% subordinated note will crimp earnings.

The BDC has been adding investments at an average yield of 12.1%.

Medical Depot’s investment income contributed about 3% of the IIIQ 2016’s total .

However, if the entire $21mn in proceeds is eventually-reinvested at 12.1%, CPTA’s investment income could be higher than $0.5mn a year.

We should note,though, that CPTA’s strategy has included directing about a tenth of capital into equity investments so those extra income dollars may not be in the bag.

CONCLUSION

One step forward for CPTA after many steps back during 2016 when record Realized Losses occurred and the distribution was cut.

The Company is a long way from proving that it’s business model works.

The stock price has dropped by a third since the IPO 3 1/4 years ago and  the distribution by 17%.

However-as the saying goes-the journey of a thousand miles begins etc., etc.

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