The following is from the GLAD Quick Update that was previously provided to subscribers of Premium BDC Reports along with revised target prices, dividend coverage and risk profile rankings, potential credit issues, earnings/dividend projections, quality of management, fee agreements, and my personal positions for all business development companies (“BDCs”).
For calendar Q2 2019, Gladstone Capital (GLAD) hit its base case projections covering its dividend due to continued management fee waivers. There was another decline in its portfolio yield from 12.0% to 11.8% offset by higher-than-expected fee and other income. Its debt-to-equity remained near historical levels due to previous repayments and issuing 939,015 shares at a weighted-average price of $9.34 (13% premium to previous NAV) through its at-the-market (“ATM”) program.
Bob Marcotte: “We entered the quarter well prepared for the elevated level of prepayment activity we experienced which allowed us to increase our assets and net interest income for the period while higher prepayment and other fee income drove much of the investment income increase for the quarter. Notwithstanding the competitive market conditions for senior debt, we are continuing to outpace prepayments and prudently grow our investment portfolio. In the near term we will continue to focus our efforts on deploying our approximate $75 million of incremental investment capacity to grow our core net interest earnings and enhance the returns to our shareholders.”
Management previously indicated that it would slowly increase its targeted debt-to-equity ratio from 0.80 to 1.00. In July 2019, its debt investment in PIC 360, LLC was repaid at par for net proceeds of $2.6 million. In August 2019, GLAD invested an additional $5.0 million in Sea Link International IRB, Inc, an existing portfolio company, through secured second lien debt.
Its net asset value (“NAV”) per share increased by $0.12 or 1.5% mostly due Alloy Die Casting marked up another $3.8 million adding almost $0.13 per share. Lignetics, Inc. and LWO Acquisitions Company (same as previous quarter) were the largest markdowns during the quarter and need to be watched.
During the previous quarter, New Trident (cost of $4.4 million, fair value of $0.0 million) was added to non-accrual status but was already marked down to zero and did not impact NAV per share. Meridian Rack & Pinion, Inc. (cost of $4.1 million, fair value of $2.1 million) was also previously added to non-accrual status and marked down by another $0.4 million during the quarter. New Trident and Meridian are the only investments on non-accrual and account for $2.1 million in fair value or 0.5% of the portfolio. If these investments were completely written off, it would impact NAV per share by around $0.07 or 0.8% and management is already waiving fees to ensure dividend coverage.
Secured first-lien debt accounts for around 46% of the portfolio fair value:
Oil & gas investments now account for around 9.5% (previously 10.0%) of the portfolio fair value and will likely be lower going as indicated by management. In March 2019, two of its energy-related portfolio companies, Impact! Chemical Technologies, Inc. (“Impact”) and WadeCo Specialties, Inc. (“WadeCo”), merged to form Imperative Holdings Corporation (“Imperative”). In connection with the merger, GLAD received a principal repayment of $10.9 million and its first-lien loans to Impact and WadeCo were restructured into one $30.0 million second lien debt investment in Imperative.
As mentioned in previous reports, in December 2018, Francis Drilling Fluids (“FDF”) was restructured upon emergence from Chapter 11 bankruptcy protection. As part of the restructure, its $27.0 million debt investment in FDF was converted to $1.35 million of preferred equity and common equity units in a new entity, FES Resources Holdings, LLC (“FES Resources”). GLAD also invested an additional $5.0 million in FES Resources through a combination of preferred equity and common equity.
Distributions and Dividends Declared
In July 2019, the Board of Directors declared the following monthly distributions to common stockholders and monthly dividends to preferred shareholders:
This information was previously made available to subscribers of Premium BDC Reports, along with:
- GLAD target prices and buying points
- GLAD risk profile, potential credit issues, and overall rankings
- GLAD dividend coverage projections and worst-case scenarios
- Real-time changes to my personal portfolio
To be a successful BDC investor:
- As companies report results, closely monitor dividend coverage potential and portfolio credit quality.
- Identify BDCs that fit your risk profile.
- Establish appropriate price targets based on relative risk and returns (mostly from regular and potential special dividends).
- Diversify your BDC portfolio with at least five companies. There are around 50 publicly traded BDCs; please be selective.