Hercules Capital (HTGC) Dividend Coverage & Risk Profile Update

The following is from the HTGC 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”).


HTGC Update Summary:

  • HTGC hit its best-case projections for Q3 2019 covering its dividend by 116% mostly due to higher onetime income and lower-than-expected ‘Employee Compensation’.
  • HTGC announced a Q3 2019 supplemental dividend of $0.03 per share and guided for “larger supplemental distribution once we finalize year-end numbers early next year.”
  • As predicted, NAV per share decreased by 2.0% or $0.21 (from $10.59 to $10.38) mostly due to unrealized losses from publicly traded equity positions (discussed later) and not related to credit quality
  • LYFT declined by 38% during Q3 2019 which resulted in around $5 million of unrealized losses during the quarter. However, LYFT recently raised full-year revenue guidance and posted better-than-expected earnings for its third quarter.
  • During Q3 2019, HTGC sold 115,316 shares of DocuSign, Inc. (DOCU).
  • Non-accruals decreased slightly due to exiting Metalysis Limited and Micell Technologies, Inc. during the quarter.
  • However, Motif BioSciences Inc. was previously considered a ‘watch list’ investment and added to non-accrual status during Q3 as well as marked down another $3.2 million.

HTGQ Q3 2019 Update

Hercules Capital (HTGC) hit its best-case projections for Q3 2019 covering its dividend by 116% mostly due to higher fee income and lower-than-expected ‘Employee Compensation’. Distributable net operating income (“DNOI”) was $0.39 per share (previous quarter was $0.40). As discussed in the previous report, HTGC’s ‘Core Yield’ has started to decline from previous levels but is not a concern.

“Our effective and core yields in the third quarter were 13.4% and 12.4% respectively, compared to 14.3% and 12.7% in the second quarter. The primary driver for the decrease in the effective yield was due to the lower early payoffs, the core yield reduced due to the two fed rate cuts in the quarter with the July cut being the main driver.”

 

As predicted, NAV per share decreased by 2.0% or $0.21 (from $10.59 to $10.38) mostly due to unrealized losses from publicly traded equity positions (discussed later) and not related to credit quality as discussed on the recent call:

“During the quarter our NAV decreased by $0.21 per share to $10.38 per share, largely related to unrealized depreciation attributable to market volatility impacting the fair value of our investment portfolio. I think the important thing to note that of the $25.5 million of unrealized depreciation, the vast majority of that was in the sort of the public book from the mark-to-market perspective. Only $2.5 million of it was attributable to the unrealized piece from the credit perspective, which is a pretty immaterial amount on a quarterly basis and we really haven’t seen any further degradation subsequent to the 930 marks that would lead us to believe that there’s further erosion with respect to valuations in our portfolio subsequent to quarter end.

As of September 30, 2019, 84.8% of its debt investments were in a senior secured first-lien position. Non-accruals decreased slightly due to exiting Metalysis Limited and Micell Technologies, Inc. during the quarter. However, Motif BioSciences Inc. was previously considered a ‘watch list’ investment and added to non-accrual status during Q3 2019 as well as marked down another $3.2 million:

 

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As discussed in the previous HTGC Deep Dive report, there have recently been declines in the public stock prices for some of its equity positions including Lyft, Inc. (LYFT), TransMedics Group, Inc. (TMDX) and BridgeBio Pharma, Inc. (BBIO). As shown in the following chart, the stock price for LYFT declined by 38% during Q3 2019 which resulted in around $5 million of unrealized losses during the quarter. However, LYFT recently raised full-year revenue guidance and posted better-than-expected earnings for its third quarter. HTGC’s management has discussed selling/monetizing its equity holdings:

“When we made those equity investments, we talked about the fact that when they approached a certain target price ranges that we would look to monetize and exit the positions. Most of those private investments came with lockup provisions, which have either just expired or are in the process of expiring over the next several quarters. And if the stocks appreciate to levels that are within our target price ranges, in the ordinary course, will look to monetize and capture some of the gains that we currently have from an unrealized perspective, if you turn them into realized gains again assuming that the stocks remain where they currently are.”

 

 

During Q3 2019, HTGC sold 115,316 shares of DocuSign, Inc. (DOCU) which had a 25% increase in stock price during Q3 2019 and was likely sold as discussed on a previous call:

Previous call: “We’re actually a big believer in DocuSign, as a product which led us to make the equity investment in the company. But, we’re not looking to just kind of sell it right away, I think it’s a great company I think it has a lot more legs for growth associated with it. But we are also now the hedge funds. So we’re not – we don’t get paid by holding on to long positions as an internally managed BDC. So once we’ve the threshold, we will liquidate the position.”

“Credit quality on the debt investment portfolio improved slightly in Q3, with a weighted average internal credit rating of 2.17 as compared to 2.18 in Q2. Our rated one-credits as a percentage of our overall investment portfolio went down slightly to 11.4% in Q3 from 12.4% in Q2, largely driven by payoffs of several rated one-credits that we were anticipating. Our rated two-credits as a percentage of our overall investment portfolio increased to 64% in Q3, from 63.9% in Q2 and our rated four and rated five credits decreased to 1.5% in Q3 from 3.6% in Q2, making up less than 2% of our investment portfolio at fair value.”

 

As discussed in previous reports, there will likely be “potential dividend increases or supplemental dividend distributions” and on October 29, 2019, the Board declared a second quarter supplemental cash distribution of $0.03 per share.

“With our total investment portfolio at $2.3 billion at cost and our debt investment portfolio at $2.1 billion at cost, our NII per share in Q3 generated 116% coverage above our quarterly based distribution of $0.32 per share. In addition to our quarterly based distribution of $0.32 for Q3, we also declared a supplemental distribution of $0.03 per share. In the aggregate, this brings our total distributions to shareholders for Q1, Q2 and Q3 to $1.02, representing a 7% increase from the same period a year ago.”

“We are also fortunate to have been able to grow our undistributed spill-over to an estimated $62 million or $0.59 per share, subject to final tax filings in 2019. Subject to market conditions and sustained financial performance, we hope to be in position to potentially declare a larger supplemental distribution once we finalize year-end numbers early next year.”

 

After closing $241 million in new debt and equity commitments in Q3 2019, HTGC has pending commitments of $36 million in signed non-binding term sheets outstanding as of October 29, 2019. Since the close of Q3 2019 and as of July 29, 2019, HTGC has funded almost $118 million of existing commitments.

“Since the close of Q3 and as of October 29, Hercules has already closed an additional $191 million of new commitments and we have pending commitment of an additional $36 million in singed, non-binding term sheet. Year-to-date through October 29, our closed new debt and equity commitments are at $1.4 billion.”

HTGC Liquidity and Capital Resources:

HTGC ended Q3 2019 with $284 million in available liquidity, including $21 million in unrestricted cash and cash equivalents, and $263 million in available credit facilities. On July 16, 2019, HTGC issued $105 million of senior unsecured notes to qualified institutional investors in a private placement with a fixed interest rate of 4.77% and are due on July 16, 2024, and will reduce borrowing costs as in the previous report.

“At the end of the quarter, our GAAP and regulatory leverage was 111.5% and 97.8% respectively, which increased compared to the second quarter due to the private placement in July and continued growth. We continue to manage the business to ensure that we remain below our 2019 communicated leverage sealing of 125%.”

 

On June 17, 2019, the Company completed a public offering of common stock, including the over-allotment option, totaling 5,750,000 of common stock for net proceeds, before expenses, of $70.5 million, including the underwriting discount and commissions of $2.2 million. During Q3 2019, the company did not issue any additional shares under its equity ATM program. As of October 28, 2019, around 10.7 million shares remain available for issuance and sale. Shareholders previously approved the reduced asset coverage ratio allowing higher leverage effective December 7, 2018. The company intends to have target leverage (debt-to-equity) ratio range of 0.95 to 1.25 and will likely use the ATM program to maintain leverage while growing the portfolio.

HTGC Equity & Warrant Portfolio

Hercules held equity positions in 53 portfolio companies with a fair value of $148.4 million and a cost basis of $201.0 million as of September 30, 2019. On a fair value basis, 29.0% or $43.4 million is related to existing public equity positions.

Hercules held warrant positions in 118 portfolio companies with a fair value of $18.9 million and a cost basis of $34.1 million as of September 30, 2019. On a fair value basis, 26.0% or $5.0 million is related to existing public warrant positions.


This information was previously made available to subscribers of Premium BDC Reports, along with:

  • HTGC target prices and buying points
  • HTGC risk profile, potential credit issues, and overall rankings
  • HTGC 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.

 

 

 

FS KKR Capital (FSK) Dividend Coverage & Risk Profile Update

The following is from the FSK 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”).


FS KKR Capital Corp. (FSK)  reported just above its base case projections but only due to materially lower incentive fees paid driven by the ‘total return’ hurdle and continued unrealized losses (discussed later). As shown in the following table, FSK would have earned $0.19 per share if the full incentive fees were paid.

FSK continues to increase its use of leverage mostly due to share repurchases but also impacted by the previous NAV declines. During Q3 2019, the company repurchased another 8 million shares at an average price of $5.95 (24% discount to NAV).

Michael Forman, Chairman and CEO. “We delivered solid financial results in the third quarter. Our strong origination activity resulted in further diversification of our investment portfolio. We also meaningfully expanded our joint venture, and we continued taking steps to strengthen our capital structure. As we move forward, I’m excited by the leadership team we have assembled and believe we are well-positioned.”

 

In December 2018, FSK’s board of directors authorized a $200 million stock repurchase program. During the nine months ended September 30, 2019, the company repurchased 19,216,367 shares at an average price per share (inclusive of commissions paid) of $6.11 (totaling $118 million). So far in Q4 2019, the company has already repurchased another 3,189,687 shares at an average price per share (inclusive of commissions paid) of $5.78 (totaling $18 million). Additional repurchases could be limited due to approaching its revised targeted leverage but funded through rotating out of portfolio assets.

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Previously, FSK was downgraded to a ‘Tier 3’ from an overall ranking and pricing standpoint (but remained a ‘Level 2’ dividend coverage implying a stable dividend) due to continued credit issues. FSK’s Board has declared a regular cash distribution for Q4 2019 of $0.19 per share, paid January 2, 2020 to stockholders of record as of the close of business on December 18, 2019. During Q3 2019, NAV per share decreased by $0.02 or 0.3% (from $7.88 to $7.86) due to $0.08 per share of net realized/unrealized losses mostly offset over-earning the dividend and share repurchases:

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Total non-accruals increased from 1.2% to 1.7% of the portfolio based on fair value due to adding Bellatrix Exploration Ltd, AVF Parent LLC, and Acosta Holdco and will be discussed in the updated FSK Deep Dive report. Also, still on non-accrual are the previously discussed energy and retail-related investments including Hilding Anders, Rockport (Relay), Advanced Lighting Technologies Inc., Petroplex Acidizing Inc, AltEn, LLC, and HM Dunn Co. There has been a $171 million increase in the amount of investments in ‘Investment Rating 3’ implying “Underperforming investment some loss of interest or dividend possible, but still expecting a positive return on investment” and needs to be watched.

 

As mentioned in previous reports, there is the possibility for improved dividend coverage through its Strategic Credit Opportunities Partners (“SCJV”).

 

 

Also, management has been working to reduce the amount of non-income producing equity investments that is now 7.9% of the portfolio (partially due to markdowns in equity investments). However, the amount of first-lien declined from 70% to 51% mostly due to combining the portfolios of FSIC and CCT:

 


This information was previously made available to subscribers of Premium BDC Reports, along with:

  • FSK target prices and buying points
  • FSK risk profile, potential credit issues, and overall rankings
  • FSK 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.

 

 

 

TCG BDC Inc. (CGBD) Risk Profile Update

The following information is from the CGBD Deep Dive 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”).


CGBD Risk Profile Update

CGBD’s portfolio remains mostly invested in true first-lien assets accounting for 70% of total investments (not including Credit Fund) highly diversified by borrower and sector, access to an experienced credit quality platform and historically low non-accruals.

“We consider our BDCs portfolio to be extremely well positioned fundamentally against this macroeconomic backdrop. We have roughly 70% of our portfolio in true first lien instruments. A high degree of investment diversification and significant under weights to more cyclical industry exposures, all of which we believe will be long-term benefits to our shareholders. We’re acutely aware that we’re investing in what could be late cycle and therefore we remain ultra-selective. Carlyle’s credit investment platform has over 100 investment professionals that have the expertise to evaluate opportunities across the capital stack, company sizes, sectors and market cycles all with the lens and relative value and fundamental credit investing.”

 

It is important to note that CGBD management conservatively values its portfolio each quarter:

From previous call: “When we held our initial earnings call as a public company back in August of 2017, I highlighted that based on our robust valuation policy, each quarter you may see changes in our valuations based on both underlying borrower performance as well as changes in market yields and that movement evaluations may not necessarily indicate any level of credit quality deterioration.”

As mentioned in the previous report, “my primary concern is 10.6% of the portfolio considered Internal Risk Rating 4”. During Q3 2019, NAV per share declined by 2.8% or $0.48 per share due to net realized/unrealized losses of $0.59 per share mostly from completely writing off its non-accrual investment in Dimensional Dental Management ($0.34 per share of unrealized losses) and additional markdowns of ‘watch list investments including Derm Growth Partners ($0.16 per share of unrealized losses). Dimensional Dental is one of the remaining investments from its “legacy last out program” which are first lien/last out loans with a secondary priority behind the first lien/first out loan with respect to principal, interest and other payments.

“Regarding valuations in NAV, our total aggregate realized and unrealized net loss was about $36 million for the quarter. One borrower Dimensional Dental contributed over half of this loss and over two-thirds of our NAV decline. As we marked our position down to almost zero. This company’s financial prospects of deteriorated materially over the last quarter. Given we hold a junior debt tranche we expect minimal recovery on our investment. This is one of the remaining credits from a legacy last out program, which is not made any new investments since 2017. And I know we’re making a conscious effort to reduce exposure in that program over the next few quarters. Regarding exits, we noted on last quarter’s call that we sold our investment in Totes. The realized loss of $11 million for the quarter primarily represents of reversal of prior period unrealized losses on this position.”

Product Quest Manufacturing was responsible for previous NAV declines and is also part of legacy last out program which I am expecting to be completely written off resulting in realized losses of $33 million or $0.56 per share but has already been mostly written off and will not materially impact upcoming NAV per share. Dimensional Dental and Product Quest were discussed on the recent call with management mentioning “going forward we’ve got residual exposure that came from that program, but we’ve got a really good line of sight to fully exiting”:

Q. “It looks like a couple of your more severe experiences have come from the Madison Capital joint venture, the last out program. Is there any thread there in hindsight, whether it’d be industry or structure? And is there a change on how you look at this avenue going forward?”

A. “Yes, something that we’ve talked a lot about as a team here. So when we started out, we had the program with Madison Capital that essentially was a first out last out program where Carlyle took the last out. We’ve stopped investing through that program back in 2017. We’re still working through some of the legacy issues that came through that program and you saw mainly in dimensional dental this quarter. I think one thing, I’m not sure I would blame it on necessarily an industry, where there is a little bit of that, but it’s more so the structure. A last-out position when as company gets into trouble and has to restructure its balance sheet. The recoveries there are tend to be relatively poor. And so that’s the main driver for us wanting to not continue to invest in that program, and I think more importantly going forward we’ve got residual exposure that came from that program, but we’ve got a really good line of sight to fully exiting, whether it’s through just getting repayments or sales or just general portfolio management.”

 

SolAero Technologies Corp. has been discussed in previous reports and was restructured during Q2 2019. As discussed in the previous report, there was around $11 million or $0.18 per share of realized losses during the quarter mostly due to exiting Indra Holdings Corp. (Totes Isotoner) that was previously on non-accrual status. However, non-accruals declined from 2.0% to 1.2% of the portfolio fair value.

From previous call: “We exited one of these positions [Totes] post quarter end at a level a bit lower than our 6/30 mark, driven by our developing view on the potential downside to our recovery in that investment. For the other non-accrual transactions these continue to be fluid and developing situations. Given the status of ongoing negotiations between the various parties we’re limited in providing additional color, but we hope to have updates over the next couple of quarters.”

TwentyEighty Investors was an investment that was previously restructured but mostly repaid in Q3 2019 and management expects to recover “over 100% of our original loan investment”:

“On a positive front, in September we receive repayment in full on our debt investment in TwentyEighty Investors, and in the last week we received equity proceeds from the sale of the remaining business lines. This was a loan we restructured back in early 2017 and with the right combination of capital, corporate governance and patients we expect to recover over 100% of our original loan investment.”

Some of the other investments that have been discussed in previous reports and/or that I am watching closely include Derm Growth Partners, PPT Management Holdings, Superior Health Linens, SPay, Inc., Legacy.com, Hydrofarm, Hummel Station, and GRO Sub Holdco. Most of these investments were marked down during Q3 2019 with the exceptions of Spay and GRO:

 

These losses were partially offset by over-earning the dividend by $0.08 per share and accretive share repurchases adding around $0.04 per share. The company repurchased another 1,168,383 shares during Q3 2019 at $14.69 per share (14% discount to previous NAV) resulting in accretion to net assets per share of $0.04. On November 4, 2019, the Board authorized a 12-month extension of its $100 million stock repurchase program at prices below reported NAV per share. The stock is still trading at 20% discount to its September 30, 2019 NAV and there will likely be additional accretive repurchases.

 

Over the last two quarters, payment-in-kind (“PIK”) income has increased from 2.1% to 4.3% partially due to ‘watch list’ investments including Superior Health Linens and Legacy.com, Inc. and needs to be watched:

“In both those scenarios, we had covenant issues and in the negotiations with the sponsor in inking an amendment, we were able to increase price and, in both cases, we increased the price in the form of PIK.”

 

As mentioned in the previous report, my primary concern is the amount of the portfolio considered ‘Internal Risk Rating 4’ defined as “Borrower is operating more than 20% below the Base Case and there is a high risk of covenant default, or it may have already occurred. Payments are current although subject to greater uncertainty, and there is moderate to high risk of payment default.” However, management discussed these investments on the previous call as “these are temporary performance issues” and “our goal remains full recovery”. Management mentioned that the recent credit issues are “idiosyncratic credit issues, not indications of either thematic risk concentrations in our portfolio or broad economic weakness”:

“Let me shift to a slightly deeper discussion on our portfolio and change in NAV this quarter. Our BDC’s portfolios highly diversified and heavily weighted with first lien positions, which represent about 70% of our portfolio as of the third quarter. We have over 140 investments in the portfolio diversified by size and sector. No single sector accounts for more than 12% of the portfolio. This portfolio construction represents our defensive approach to sustainable dividend creation, which is our investment objective. However, portfolio construction alone does not immunize the portfolio from idiosyncratic risk, but we expect to outperform the industry over the long-term. Our results this quarter were negatively impacted by a couple of investments that drove the vast majority of the 2.8% quarter-over-quarter decline in NAV per share this quarter.”

“We have aggressively moved to manage our remaining risk leveraging the broader Carlyle Global Credit workout team and other platform capabilities. As I mentioned last quarter, our team is focused on stabilizing NAV through prudent underwriting standards and active portfolio management. We are confident we can deliver strong long-term credit performance and drive shareholder value. So any individual quarter may exhibit some level of volatility. The core tenants of our investment philosophy are unchanged. We continue to invest in the best relative value opportunities maintain a strong bias toward senior debt and defensive industry exposures and directly originated from sponsors with whom we have meaningful relationships.”

“Regarding the overall portfolio, the weighted average internal risk rating remained 2.3 and the total watch list was flat quarter-over-quarter with no new additions. From a credit perspective, the key metrics for new originations remain largely in line with our broader portfolio in prior quarters. The loan to value was under 50%, the average leverage multiple was roughly 5.5 times. Average EBITDA was $90 million, significantly higher than our average portfolio EBITDA reflecting progress both deploying our scale capital more effectively as well as inroads made displacing syndicated market.”

From previous call: “We have dug into each situation and ascertained they represent idiosyncratic credit issues, not indications of either thematic risk concentrations in our portfolio or broad economic weakness. As you would expect, these loans are a significant focus for our team and we have committed the necessary resources to maximize shareholder value. For the most part, for the names that are on our watch list or on non-accrual, they’re idiosyncratic situations. But one thing we can point to is that within the healthcare services space, where we’re seeing companies do more aggressive types of roll-up transactions that those come with more challenges.”


This information was previously made available to subscribers of Premium BDC Reports, along with:

  • CGBD target prices and buying points
  • CGBD risk profile, potential credit issues, and overall rankings
  • CGBD 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.

 

 

Goldman Sachs BDC (GSBD) Dividend Coverage & Risk Profile Update

The following is from the GSBD 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”).



GSBD Update Summary:

  • GSBD beat its base-case projections covering its dividend by 107%even after taking into account lower-than-expected portfolio yield and a decline in the size of the portfolio.
  • On September 3, 2019, Vast Broadband announced that it had completed its acquisition of NTS Communication, Inc. and repaid its loan in Q3 2019 resulting in a realized loss of $7.2 million. However, this a positive development as the company will be reinvesting proceeds into performing assets.
  • NAV declined by $0.23 per share or 1.3% mostly due to markdowns of ‘watch list’ investments (discussed next) slightly offset by overearning the dividend.
  • One of its ‘watch list’ investments (MPI Products LLC) was added to non-accrual status “due to its capital condition” and marked down another $3.7 million resulting in NAV decline of $0.09 per share.
  • Also, the largest ‘watch list’ investment Zep Inc. was marked down another $2.4 million “due to financial underperformance” impacting NAV by $0.06 per share.
  • These investments will be discussed along with a revised ‘watch list’ in the updated GSBD Deep Dive report.

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Goldman Sachs BDC (GSBD) beat its base-case projections covering its dividend by 107% even after taking into account lower-than-expected portfolio yield as well as a decline in the size of the overall portfolio. As discussed in the previous report, on September 3, 2019, Vast Broadband announced that it had completed its acquisition of NTS Communication, Inc. and repaid its loan in Q3 2019 resulting in a realized loss of $7.2 million. However, this a positive development as the company will be reinvesting proceeds into performing assets.

 

Net asset value (“NAV”) declined by $0.23 per share or 1.3% (from $17.21 to $16.98) mostly due to markdowns of ‘watch list’ investments (discussed next) slightly offset by overearning the dividend by $0.02 per share:

 

During Q3 2019, one of its ‘watch list’ investments (MPI Products LLC) was added to non-accrual status “due to its capital condition” and marked down another $3.7 million resulting in NAV decline of $0.09 per share. Also, the largest ‘watch list’ investment Zep Inc. was marked down another $2.4 million “due to financial underperformance” impacting NAV by $0.06 per share. These investments will be discussed along with a revised ‘watch list’ in the updated GSBD Deep Dive report.

“Net change in unrealized appreciation (depreciation) in our investments for the three and nine months ended September 30, 2019 was primarily driven by the reversal of unrealized depreciation in connection with the aforementioned exchange with ASC Acquisition Holdings, LLC., and the full exit from our investments in NTS Communications, Inc. The net change was offset by the unrealized depreciation in Zep, Inc., which was due to financial underperformance, and the placement of MPI Products LLC on non-accrual status due to its capital condition.”

Total non-accruals declined from 3.5% to 1.0% of the portfolio fair value due to the previously discussed repayment of NTS Communication and one of the investments assumed from the SCF portfolio Professional Physical Therapy added back to accrual status in Q3 2019. However, as MPI Products LLC was added to non-accrual as discussed earlier and other recently marked down investments need to be ‘watched’.

 


 

New investments during Q3 2019 were 99% first-lien and the portfolio remains heavily invested in first-lien debt as shown below. Over the past five quarters, GSBD’s proportion of its first-lien debt investments within its portfolio has increased from 53% to 75% and second-lien debt investments decreased from 36% to 18%:


 


As discussed previously, the company dissolved its Senior Credit Fund (“SCF”) during Q2 2019 and received $215 million of assets financed directly on its balance sheet. This improved the credit quality of the overall portfolio including diversification and increased first-lien. In June 2018, shareholders approved the reduced asset coverage ratio of at least 150% (potentially allowing a debt-to-equity of 2.00) and management reduced the base management fee from 1.50% to 1.00%, lowering expenses and improving dividend coverage as shown in the previous table. Management does not have a target for leverage (debt-to-equity) but has mentioned that leverage will increase gradually along with the amount of first-lien (as a %):

“We have not set forth a specific target leverage range for the company as the reduced asset coverage requirement provides the company with overall greater balance sheet flexibility. However, we will seek to maintain a meaningful cushion relative to the regulatory asset coverage requirements, as we have done historically. We would expect our leverage ratio to continue to gradually increase if we continue to find attractive first lien senior loans.”

 


This information was previously made available to subscribers of Premium BDC Reports, along with:

  • GSBD target prices and buying points
  • GSBD risk profile, potential credit issues, and overall rankings
  • GSBD dividend coverage projections and worst-case scenarios
  • Real-time changes to my personal portfolio

To be a successful BDC investor:

  • Diversify your BDC portfolio with at least five companies. There are around 50 publicly traded BDCs; please be selective.

Golub Capital (GBDC) Dividend Coverage & Risk Profile Update

The following is from the GBDC Deep Dive 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”).


GBDC Fiscal Year 2019 Fourth Quarter Portfolio Update

On October 9, 2019, GBDC announced that it had originated $130.4 million in new middle-market investment commitments during the three months ended September 30, 2019. Approximately 87% of the new middle-market investment commitments were one stop loans, 10% were senior secured loans and approximately 3% were equity securities. Of the new middle-market investment commitments, $120.7 million funded at close.

On September 16, 2019, GBDC completed its acquisition of Golub Capital Investment Corporation (“GCIC”), with GBDC as the surviving company. Including $2.3 billion of investments acquired from GCIC and factoring in debt repayments, sales of securities, net fundings on revolvers and net change in unrealized gains (losses) at GBDC, total investments at fair value are estimated to be $4.3 billion as of September 30, 2019.

“Upon closing of the merger, GCIC stockholders received 0.865 shares of GBDC common stock for each share of GCIC common stock. The transaction is estimated to be 4.5% accretive to GBDC’s net asset value (“NAV”) per share as of June 30, 2019. The final NAV accretion resulting from the merger will be disclosed when GBDC reports its results for the fiscal year ending September 30, 2019. The GBDC Board of Directors has previously disclosed an intention to increase GBDC’s regular quarterly distributions to $0.33 per share after the closing of the merger, provided that GBDC’s Board of Directors reserves the right to revisit this intention in its sole discretion.”


GBDC Dividend Coverage Update

GBDC has completed its acquisition of Golub Capital Investment Corporation (“GCIC”) and the Board intends to increase the regular quarterly dividend to $0.33 per share. GBDC’s generous hurdle rate of 8% basically ensures dividend coverage especially after taking into account the expected 4.5% increase in its NAV per share.

“Based on GBDC’s NAV per share as of June 30, 2019 and GCIC’s estimated NAV per share of $15.00 as of the June 30, 2019, the accretion to GBDC’s NAV would be approximately $0.72 per share, or about 4.5%. So that equates to roughly two quarters of historical net income per share for GBDC.”

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The company paid a special dividend of $0.12/share in 2018 and there is a good chance of continued special dividends as the company continues to grow undistributed income and gains on a GAAP basis. Higher quality BDCs typically support regular dividends with recurring net investment income (“NII”) and pay special/supplemental dividends with additional income and/or capital gains (usually from equity investments), similar to Main Street Capital (MAIN).

“The special distribution is due to taxable income exceeding distributions over the past year. This is the third consecutive calendar year we will have paid a special distribution.”

Many BDCs retain undistributed income and some incur excise taxes rather than pay out to shareholders as they see it as “cheap capital” to reinvest and grow the portfolio. GBDC has chosen to a pay special dividend to avoid excise tax and will raise capital through accretive equity offerings as needed. See discussion from the most recent earnings call below.

Q. “On the special dividend, obviously it’s been a plan for the last several years to pay out the full amount or roughly the full amount of taxable income. I mean, is that going to continue to be your policy, basically avoiding excise tax, going forward, and if you have any thoughts of that, in the context of the GCIC acquisition?”

A. “That will continue to be our policy. That’s our intention. We don’t understand why it isn’t everyone’s policy. You have your choices of BDC manager to pay an excise tax or not pay an excise tax, and you can avoid paying the excise tax by making sure that you have paid out distributions equal to or almost equal to your taxable income. This is not a hard calculus. So, it’s good for shareholders to avoid paying the excise tax. I anticipate we will continue with that same policy.”

On February 5, 2019, shareholders approved the reduced asset coverage requirements allowing higher leverage but management continues to target a regulatory debt-to-equity ratio of 1.00:

GBDC is currently above its targeted leverage and through its third license from the Small Business Administration (“SBA”) the company has access to a maximum of $350 million of SBA debentures. However, leverage will likely decline due to the upcoming merger (discussed later) as shown in the updated projections and discussed by management:

“We said it was GBDC’s current intention to continue to target a GAAP debt-to-equity ratio of about 1.0 times. Although quarter-end GAAP leverage was a bit over our target, our strategy and near-term expectations for leverage haven’t changed. It remains our intention to target GBDC’s leverage at about 1.0 times. We currently anticipate that the proposed GCIC merger will be deleveraging for GBDC. So with GBDC running a bit above target now, we think the combined company will end up with leverage more in line with our target post-closing.”

GBDC’s liquidity and capital resources are primarily from its debt securitizations (also known as collateralized loan obligations, or CLOs), SBA debentures, and revolving credit facilities. On February 1, 2019, GBDC closed on a new $200 million credit facility with Morgan Stanley priced at LIBOR +2.05% and was used to repay its revolving credit facility with Wells Fargo. On September 6, 2019, GBDC amended the facility increasing the borrowing capacity to $300 million. As of June 30, 2019, the company had $41 million of available SBA debenture commitments, none of which was available to be drawn.

For the quarter ended June 30, 2019, GBDC hit its base case projections covering its dividend by 100%. There was a meaningful decline in its portfolio yield and leverage remains higher as shareholders previously approved the reduced asset coverage requirements allowing higher leverage.

“Excluding an approximately $28,000 accrual for the capital gain incentive fee, net investment income for the quarter ended June 30th remained unchanged at $19.4 million, or $0.32 per share, as compared to $19.4 million, or $0.32 per share, for the prior quarter. Consistent with previous quarters, we have provided net investment income per share excluding the capital gains incentive fee accrual as we think this adjusted NII is a more meaningful measure.”

GBDC has predictably boring quarterly NII of $0.32 mostly due to its fee structure combined with strong portfolio credit quality. My financial projections use a wide range of assumptions but because of the incentive fee hurdle, the dividend is consistently covered by design.

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There was a decline in its overall portfolio yield from 8.8% to 8.6% due to new investments at lower yields of 8.1% as compared to 8.8% for the investments paid off.

“As shown on the bottom table, the weighted average rate of 8.1% on new investments this quarter was down from 8.7% in the previous quarter, primarily due to a declining LIBOR rate and a modest increase in the percentage of lower yielding senior secured originations. The income yield decreased by 20 basis points to 8.6% for the quarter ended June 30, primarily due to a decrease in LIBOR over the past two quarters. The investment income yield, or the dark blue line, which includes amortization of fees and discounts, remained stable at 9.2% during the quarter due to an increase in prepayments fees and other fee income.”

GBDC Risk Profile Update

GBDC is a ‘safer’ lower yield BDC for many reasons including strong covenant protections, over 90% of the portfolio in senior secured and One Stop ‘bank quality’ loans and one of the lowest stated portfolio yields in the industry (typically indicating higher credit quality). GBDC’s continued focus on ‘quality over quantity’ has resulted in lower portfolio growth and/or a reduced portfolio yield but dividend coverage has remained stable due to the investor-friendly incentive fee structure.

“Our late cycle investing strategy is a simple one. You have heard me talk about it before and we have stuck with it, staying at the top of the capital structure, partnering with strong sponsors and resilient companies, remaining highly selective on underwriting, leaning in on our competitive advantages, and when necessary, giving up some yield for higher credit quality and portfolio stability.”

New investment commitments totaled $157 million with approximately 14% were senior secured loans, 84% were one stop loans, and 2% were in the SLF and junior debt.

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Joerns Healthcare ($1.8 million FV, $3.2 million cost) was added to non-accrual during the quarter. The other three investments that were on non-accrual included Aris Teleradiology ($0.8 million FV, $3.2 million cost), Uinta Brewing Company ($0.8 million FV, $0.9 million cost) and Tresys Technology Holdings ($3.8 million FV, $4.5 million cost). However, one of these investments was repaid in full subsequent to quarter-end which was likely Tresys as discussed next and was marked up by $2.0 million as shown in the following table.

“Flipping to the next two slides, the number of non-accrual investments increased from three to four investments, one of which was fully repaid with 100% recovery on our remaining principal balance subsequent to quarter end. As of June 30, 2019, non-accrual investments as a percentage of total investments at cost and fair value were 0.7% and 0.4%, respectively.”

It is important to remember that GBDC has 225 portfolio companies, so three to four on non-accrual is to be expected. As shown in the previous table, GBDCs ‘watch list’ investments only account for 3.4% of the portfolio fair value which is considered low. Safer BDCs typically have around 3% to 5% of the portfolio that needs to be ‘watched’ including ORCC, TSLX, CSWC, MAIN, SUNS, and PFLT.

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Tresys Technology Holdings was reportedly purchased by DC Capital Partners and then merged with Owl Cyber Defense. Owl’s CTO mentioned that the two companies are “very complementary” because Owl is practiced in hardware security while Tresys specializes in software security.

Joerns Healthcare recently filed for bankruptcy and received approval for its restructuring plan that would eliminate $320 million of debt, with existing loans converted into equity and an additional $40 million of new financing to support Joerns’ ongoing operations and continued investments. Joerns will move forward under new ownership composed of its prepetition secured lenders, who have designated as initial board members including Patrick Hayes (Golub Capital). Including the SLF exposure, GBDC had around $8.2 million marked at 62% of cost.

“The successful execution of our restructuring plan significantly enhances our company’s long-term viability and competitive position,” said Joerns Senior Vice President and Chief Financial Officer John Regan. “By reducing our debt load, we can increase our investments in several key growth opportunities and enhance our efforts to continue delivering an exceptional customer experience. This plan confirmation is an important step in our 130-year history to continue our drive every day to fulfill our commitment to be an exceptional company which improves the lives of others.”

Payment-in-kind (“PIK”) interest income remains low with only $1.8 million over the last three quarters accounting for around 1.5% of total income. However, GBDC does not accrue PIK interest if the portfolio company valuation indicates that the PIK interest is not likely to be collectible. One of the investments that I am watching closely is Oliver Street Dermatology that has been marked down over the previous quarters and was partially (1.0%) converted to PIK:

Q. “I saw the — a change to the mark and addition of a PIK component to Oliver Street Dermatology. So wanted to ask what’s going on there?”

A. “I’m going defer discussing a specific situation like Oliver Street. I don’t think it is an appropriate topic for this call.”

PPT Management Holdings has been discussed in previous reports and is also a portfolio investment for CGBD which has marked this investment at 85% of cost (see CGBD report).

GBDC’s net asset value (“NAV”) per share remained stable at $15.95 but has increased 23 out of the last 28 quarters, after excluding the impact from previous special dividends

This information was previously made available to subscribers of Premium BDC Reports, along with:

  • GBDC target prices and buying points
  • GBDC risk profile, potential credit issues, and overall rankings
  • GBDC 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.

PennantPark Investment (PNNT) Dividend Coverage & Risk Profile Update

The following is from the PNNT Deep Dive 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”).


PNNT Dividend Coverage Update:

PNNT continues to cover its dividend for a few reasons including the previously reduced management fees, the ability to use higher leverage with SBA borrowings, and rotating the portfolio into income-producing assets from upcoming monetizations (selling and reinvesting) of its equity investments:

“With asset yields coming down over the last several years, we’re looking to create attractive risk-adjusted returns and our portfolio. We’re executing a three point plan to do so. Number one, we’re focused on lower risk primarily secured investments, thereby reducing the volatility of our earnings stream. Number two, we’re also focused on reducing risk from the standpoint of diversification, as our portfolio rotates, we intend to have a more diversified portfolio with generally modest by sizes relative to our overall capital. Number three, we look forward to continuing to monetize the equity portion of our portfolio. Over time we’re targeting equity being 5% to 10% of our portfolio.”

The company had approximately $0.30 per share of taxable spillover income/gains and the current dividend is sustainable after taking into account higher leverage offsetting lower portfolio yield with the adjusted fee structure as shown in the Leverage Analysis. Also, management discussed the possibility of increased earnings through a senior loan joint venture:

“We are also actively assessing other options for increased earnings, including another SBIC and the senior loan joint venture, similar to the successful JV with PFLT.”

As shown below, equity investments are now around 14% of the portfolio and the company will likely continue to use higher leverage as it increases the amount of first-lien positions that now account for 59% of the portfolio (up from 40% five quarters ago).

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For calendar Q2 2019, PNNT reported just below its base case projections lower portfolio yield partially offset by higher ‘other income’. ‘Provision for taxes’ of $0.3 million is not included when calculating ‘Core NII’ resulting in net investment income (“NII”) per share of $0.178 and 99% coverage of the dividend.

There was a meaningful decline in the overall portfolio yield from 10.6% to 10.1% as expected partly due to the previously discussed exit of its largest investment Parq Holdings in May 2019 that was yielding 14.6%. On February 5, 2019, shareholders approved the adoption of the modified asset coverage requirements allowing higher leverage and the advisor agreed to reduce the base management fee from 1.50% to 1.00% on gross assets that exceed 200%.

Art Penn, Chairman and CEO: “We are pleased that we are making substantial progress toward enhancing our portfolio by moving into more senior secured positions, which we believe will result in even more steady and stable coverage of our dividend over time. Additionally, our earnings stream will continue to improve based on a gradual increase in our debt-to-equity ratio, while maintaining a prudent debt profile.”

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PNNT will be offsetting the impact from lower yields through the rotation out of non-income producing assets as well as increasing leverage. Previously, PNNT was keeping a conservative leverage policy of GAAP debt-to-equity (includes SBA debentures) near 0.80 until it can rotate the portfolio into safer assets.” However, the company has already increased the amount of first-lien debt from 40% to 59% of the portfolio over the last five quarters and is slowly increasing its regulatory debt-to-equity (excludes SBA debentures) to 1.50:

“Along with a lower risk portfolio, we intend to prudently target higher leverage. Over time, we are targeting a regulatory debt-to-equity ratio of 1.1 to 1.5x. We will not reach this target overnight. We will continue to carefully invest, and it may take us several quarters to reach this new target.”

The company has significant borrowing capacity due to its SBA leverage at 10-year fixed rates (current average of 3.1%) that are excluded from typical BDC leverage ratios. PNNT has applied for its third SBIC license that would provide an additional $175 million of SBA financing.

On September 25, 2019, PNNT priced its public offering of $75 million of 5.50% unsecured notes due October 15, 2024, trading under the symbol “PNNTG” and are included in the BDC Google Sheets and currently considered a ‘Hold’.

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On September 4, 2019, PNNT amended its SunTrust Credit Facility increasing the amount of commitments from $445 million to $475 million and amended the covenants “to enable us to utilize the flexibility and incremental leverage provided by the SBCAA.

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As expected, there have been no additional share repurchases due to only around $0.5 million of availability. Previously, PNNT purchased 1 million shares during the three months ended March 31, 2019, at a weighted average price of around $7.10 per share or a 22% discount to its previously reported NAV per share.

“We purchased $7 million of a common stock this quarter as part of our stock repurchase program, which was authorized by our board. We’ve completed our program and have purchased $29.5 million of stock. The stock buyback program is accretive to both NAV and income per share. The accretive effect of our share buyback was $0.03 per share.”

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PNNT Risk Profile Discussion:

  • Please see the end of this report for previous management discussion of historical credit performance including during the previous recession.

As mentioned earlier, management is in the process of “de-risking” the portfolio which is currently invested 59% in senior first-lien secured debt, 23% in second-lien secured debt, 4% in subordinated debt and 14% in preferred and common equity. Management has its “three-point plan” that includes rotating the portfolio into higher credit quality first and second-lien lower-yielding debt that will likely result in continued lower portfolio yields:

“We are focused on lower risk, primarily secured investments, thereby reducing the volatility on our earnings stream. Investments secured by either a first or second lien are about 82% of the portfolio. We are also focused on reducing risk from the standpoint of diversification. So number two, as our portfolio rotates, we intend to have a more diversified portfolio with generally modest bite sizes, relative to our overall capital. And number three, we look forward to continuing to monetize the equity portion of our portfolio. Over time, we’re targeting equity being between 5% to 10% of our overall portfolio. Our portfolio is constructed to withstand market and economic volatility. In general, our overall portfolio is performing well. We have a cash interest coverage ratio of 2.5 times and a debt to EBITDA ratio of 4.7 times at cost on our cash flow loans.”

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During calendar Q2 2019, PNNT’s net asset value (“NAV”) per share declined by $0.09 or 1.0% (from $8.83 to $8.74) due to multiple markups and markdowns during the quarter. Some of the largest markdowns were previously discussed companies including Hollander Sleep Products, ETX Energy and AKW Holdings Limited. Similar to PennantPark Floating Rate Capital (PFLT), its investment in Hollander Sleep Products, was previously added to non-accrual status and marked down by another $7.9 million during the recent quarter impacting NAV per share by almost $0.12.

PT Networks was also marked down and needs to be watched. Some of the largest markups included its investments MidOcean JF Holdings and RAM Energy (similar to the previous quarter). On June 14, 2019, Superior Digital Displays, LLC filed for Chapter 7 bankruptcy protection and is no longer reflected on the Schedule of Investments.


During calendar Q2 2019, Hollander filed for bankruptcy “citing a severe cash squeeze due in part to substantial price increases for materials”. A Chapter 11 reorganization plan negotiated with lenders would convert about $166.5 million of Hollander’s $233 million debt burden to equity but the company said it “will also be running a marketing process to determine whether there are alternative transactions to ensure that the company maximizes value.”

CEO Marc Pfefferle said “Upon emergence [from bankruptcy], we will have a stronger balance sheet and the financial flexibility needed to compete in today’s dynamic business environment now and over the long-term.”

In June 2019, Hollander announced that it could be closing its plant in Thompson, Georgia. In addition, Hollander has been spending money to integrate Pacific Coast Feather Co., which it acquired in 2017. Hollander accounted for around 0.9% of PNNT’s portfolio as of Ju ne 30, 2019, but was not contributing to earnings as it had been put on non-accrual. The worst-case scenario is a complete writedown and would impact NAV per share by around $0.17 or 2.0%. Management discussed Hollander on the recent call:

Q. “On the Hollander, could you give us — I don’t — obviously, you’ve got historically a good track record of recoveries when you do have a nonaccrual, but you have that many and you have a track record of being very patient in order to get that recovery. So Hollander, obviously, it’s now filed Chapter 11. You’ve got a dip in there. There’s a debt-to-equity conversion proposal, I think, in the restructuring. I mean can you give us any outlook on what’s going on? Whether the objections within the creditors or if that’s likely to — how exactly that’s likely to evolve?”

A. “I can only give you what’s public information but I think kind of give you directionally what’s going on. So it’s going through the bankruptcy process now. They’re talking horse bids that are being cultivated outside of the creditors. We will see where those stalking horse bids come. We’ll see what the creditors to. We are not the largest lender here. There is another Wellman lender who is larger than us who was in this, who was going to be a driver of the — a big driver of the ultimate outcome. So that’s an independent entity from us. So we have — we can’t really control them. We can control our capital. So unclear. In the coming weeks I think this process will roll through, there’ll be clarity on it, where we are hugely disappointed in, obviously, the performance of this company. We think that given time, this company can have a lot of value, but we are not as much in control as we’d like to be in this particular situation. So we’ll see, we’ll see where it’s going to play out in the bankruptcy court in the coming weeks and that’s all I can really tell you right now,

Its investment in U.S. Well Services (USWS) is a common equity position which is a publicly-traded company that has not done so well since the end of Q2 2019 as shown below. I am expecting unrealized losses over the coming quarters.

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Energy, oil & gas exposure increased to 12.8% of the portfolio fair value (previously 12.3%) due to the previously discussed unrealized appreciation and an additional $10 million debt investment in RAM Energy.

As discussed in previous reports, RAM Energy and ETX Energy have previously sold non-core assets to generate liquidity/stability. Its investment in RAM Energy was previously restructured to reduce the amount of PIK income and ETX Energy was restructured resulting in realized losses but potential equity upside potential.


This information was previously made available to subscribers of Premium BDC Reports, along with:

  • PNNT target prices and buying points
  • PNNT risk profile, potential credit issues, and overall rankings
  • PNNT 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.

Prospect Capital (PSEC) Dividend Coverage & Risk Profile Update

The following is from the PSEC Deep Dive 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, Prospect Capital (PSEC) reported below base case projections due to a decline in portfolio investments and lower-than-expected dividend income. Interest and total income continue to decline with a debt-to-equity that remains at 0.73 (mid target leverage range). PSEC’s stock price will likely trade lower due to continued declines in income, earnings and dividend coverage as shown in the following table.

As predicted, its net asset value (“NAV”) per share decreased by 0.8% or $0.07 (from $9.08 to $9.01) due to additional markdowns in non-accrual investments including United Sporting Companies and Pacific World resulting in unrealized losses of almost $31 million or $0.08 per share. These losses were partially offset by gains in other non-accrual investments Edmentum Ultimate Holdings and USES Corp.

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Non-accruals remain around 8.2% of the portfolio at cost and declined to around 3.0% at fair value (previously 3.4%) due to the previously discussed markdowns.

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As mentioned in the previous report, primary concerns include portfolio concentration issues including its “top 10 investments accounting for over 40% of the portfolio” and the amount of equity investments that continue to increase “accounting for over 16% of the portfolio”. Also mentioned was that “InterDent, Inc. remains one of its largest investment and needs to be watched.” Previously, PSEC extended its loans to InterDent, which were past due as well as being marked down “but still marked near cost and likely overvalued”. During calendar Q2 2018, PSEC assumed control of InterDent and as shown in the following table, PSEC only placed around $41 million of the $249 million loans with InterDent on non-accrual. There is a chance that the other loans could be placed on non-accrual that would have a meaningful impact upcoming to dividend coverage. Also, InterDent still accounts for around $0.61 per share or 6.8% of NAV.

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Its Term A and B loans to Pacific World remain on non-accrual status and continue to be marked down but still account for around $0.31 per share or 3.4% of NAV.

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I consider PSEC to have a higher risk portfolio due to the previous rotation into higher yield assets during a period of potentially higher defaults and later stage credit cycle concerns, CLO exposure of 16% combined with real-estate 15%, online consumer loans of 3%, consumer finance of 11% and energy, oil & gas exposure of 3%. As mentioned in previous reports, Moody’s and S&P Global Ratings also consider the CLO, real-estate and online lending to be riskier allocations that currently account for almost 34% of the portfolio.


This information was previously made available to subscribers of Premium BDC Reports, along with:

  • PSEC target prices and buying points
  • PSEC risk profile, potential credit issues, and overall rankings
  • PSEC 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.

TCG BDC Inc. (CGBD) Dividend Coverage & Risk Profile Update

The following is from the CGBD Deep Dive 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, TCG BDC Inc. (CGBD) covered its dividend by 125% reporting just below its best-case projections. Over the last four quarters, its average earnings have been almost $0.45 per share compared to its quarterly dividend of $0.37 per share.

“We generated net investment income of $28 million or $0.46 per share, $0.01 higher than the $0.45 we produced in the first quarter. We declared a regular $0.37 dividend and as we previewed last quarter, we also declared a $0.08 special dividend for a total of $0.45 in dividends declared in the quarter. Our Company has consistently produced net investment income in excess of our quarterly dividend and we expect to continue this trend going forward.”

The company still has $0.21 per share of undistributed income available for a special dividend that will likely be announced in Q4 2019:

“We will consider additional future special dividends with some regularity as appropriate and as our core earnings allow. At the end of the second quarter, we had approximately $0.21 per share in spillover income to fund special dividends in future periods.”

The company has covered its dividend by an average of 118% over the last 8 quarters due to continued increases in recurring sources of income implying the potential for an increase to regular quarterly dividend and was discussed on a previous call:

“Given the consistency of our NII performance, we’ll be considering an increase to our stated quarterly dividend as well.”

The company repurchased another 1,089,559 shares during Q2 2019 at $14.91 per share (14% discount to previous NAV) resulting in accretion to net assets per share of $0.04. On November 5, 2018, the Board approved a $100 million stock repurchase program at prices below reported NAV per share through November 5, 2019, and in accordance with the guidelines specified in Rule 10b-18 of the Exchange Act. The stock is still trading at 15% discount to NAV and there will likely be additional accretive repurchases including another 427,141 so far in Q3 2019.

“As of today, we have $58 million remaining on our $100 million repurchase authorization implemented during the fourth quarter of 2018. We will continue to repurchase shares at or near our current valuation as we do not believe our current share price accurately reflects the strength of our investment platform.”

The company has been increasing its use of leverage that will likely continue. Previously, CGBD received shareholder approval to reduce its asset coverage requirement to 150% effective June 7, 2018, and the Board approved a 0.50% reduction in the 1.50% annual base management fee on assets financed using leverage in excess of 1.0x debt to equity. As of June 30, 2019, CGBD had cash and cash equivalents of $62 million and $207 million available for additional borrowings under its revolving credit facilities. Management guided for active portfolio growth in Q3 2019 due to “a steady originations pipeline combined with more modest repayments expected this quarter” and is taken into account with the updated projections:

“During the quarter, we increased commitments under our revolving credit facility by another $80 million. So we had about $340 million of total unused commitments under our credit facility. Statutory leverage was 1.07, generally in line with prior quarter giving you the growth in the portfolio. However, we do see this level increasing more meaningfully by the end of the third quarter due to a steady originations pipeline combined with more modest repayments expected this quarter. And given them more favorable rate environments for issuers, we anticipate exploring additional financing transactions in the near-term to increase our operational flexibility we’ll be looking at all areas of the market including the private and public capital markets.”

CGBD has a lower cost of borrowings including its previously reset 2015 CLO Notes and the credit facilities at around LIBOR + 200/225.

“Regarding our liabilities, we continue to benefit from the association with one of the premier CLO platforms in the world. This quarter, we priced our fourth middle market CLO further diversifying our sources of financing and reducing our overall cost of debt. We continue to be one of the few BDCs that has an investment portfolio anchored in first-lien senior secured loans with the scale and diversification necessary to support the issuance of CLOs. This not only provides our BDC and our shareholders with lower cost of debt relative to our peers but perhaps more importantly, it provides us with non mark-to-market term financing which we feel is highly valuable in markets with increased volatility.”

Middle Market Credit Fund, LLC (“Credit Fund”):

Investments in the Credit Fund increased from $1.26 billion to $1.33 billion during Q2 2019 producing a 12.7% annualized yield. The Credit Fund’s new investment fundings were $121 million for the quarter with sales and repayments of $43 million.

“Moving onto the JVs performance, the dividend yield on our equity in the JV was about 13% for the second quarter. As previewed on last quarter’s call in late May, we closed our second CLO at the JV, which resulted in an overall reduction in the JVs cost of capital by about 20 basis points.”

Similar to other BDCs, CGBD has added asset-based lending (“ABL”) to its portfolio which will likely provide higher risk-adjusted returns:

From previous call: “Our thesis was and remains that an ABL strategy is complementary to our core cash flow middle markets, sponsor finance business. Asset based loan performance and recovery rates have been strong and consistent across the market cycles. ABL’s have better structural protections in the form of borrowing bases and covenants and cash flow loans and adding an ABL underwriting capability creates more defensive and diversified company across more asset classes with potentially lower correlation. This quarter, we made two investments in the strategy at attractive yields. We expect to grow the strategy meaningfully which should drive higher ROE for the BDC.”

CGBD Risk Profile Update:

CGBD has a lower risk portfolio due to 89% of the portfolio in first-lien assets (including Credit Fund) highly diversified by borrower and sector, access to an experienced credit quality platform and historically low non-accruals.

“We consider our BDCs portfolio to be extremely well positioned fundamentally against this macroeconomic backdrop. We have 70% of our portfolio in true first lien instruments. A high degree of investment diversification and significant under weights to more cyclical industry exposures, all of which we believe will be long-term benefits to our shareholders. We’re acutely aware that we’re investing in what could be late cycle and therefore we remain ultra-selective. Carlyle’s credit investment platform has over 100 investment professionals that have the expertise to evaluate opportunities across the capital stack, company sizes, sectors and market cycles all with the lens and relative value and fundamental credit investing.”

During Q2 2019, net asset value (“NAV”) per share decreased by 1.4% or $0.28 per share due to net realized/unrealized losses of $0.29 per share partially from additional non-accruals (discussed later) and paying a special dividend of $0.08 per share, partially offset by accretive share repurchases adding $0.04 per share and over-earning the dividend. Management mentioned that the recent credit issues are “idiosyncratic credit issues, not indications of either thematic risk concentrations in our portfolio or broad economic weakness”:

“The one controllable area which fell short of expectations in Q2 was the progression of our NAV, which was impacted by higher realized and unrealized losses than we would expect to see in normal course. We have dug into each situation and ascertained they represent idiosyncratic credit issues, not indications of either thematic risk concentrations in our portfolio or broad economic weakness. As you would expect, these loans are a significant focus for our team and we have committed the necessary resources to maximize shareholder value. For the most part, for the names that are on our watch list or on non-accrual, they’re idiosyncratic situations. But one thing we can point to is that within the healthcare services space, where we’re seeing companies do more aggressive types of roll-up transactions that those come with more challenges.”

As mentioned in the previous report, “my primary concern is two investments that were added to ‘Internal Risk Rating 4’. However, management discussed these investments on the recent call as “these are temporary performance issues” and “our goal remains full recovery”:

“The weighted average internal risk rating remained 2.3. However, total watch list loans again increased this quarter with a net addition of three borrowers. With the overall theme is that in most cases we believe these are temporary performance issues. Sponsors have been supportive with additional capital. We’ve closed their negotiated credit enhancing amendments and our goal remains full recovery.”

“During the quarter, we repurchased 1.1 million shares of stock for over $16 million, which was $0.04 per share accretive to NAV. Stabilizing and growing our NAV via our integrated platform approach will be the major focus area for me and the team over the next few years.”

During Q2 2019, non-accruals increased due to adding Dimensional Dental Management and Indra Holdings Corp. (Totes Isotoner) during the quarter resulting in NAV decline of almost $0.16 per share. Totes hired Houlihan Lokey, which specializes in restructurings and CGBD exited this investment during Q3 2019 which will result in additional realized losses and a slight decline in NAV due to exiting at “a bit lower” value:

“The level of non-accruals increased this quarter from 0.8% to 2% based on fair value with the addition of two borrowers. We exited one of these positions [Totes] post quarter end at a level a bit lower than our 6/30 mark, driven by our developing view on the potential downside to our recovery in that investment. For the other non-accrual transactions these continue to be fluid and developing situations. Given the status of ongoing negotiations between the various parties we’re limited in providing additional color, but we hope to have updates over the next couple of quarters.”

SolAero Technologies Corp. has been discussed in previous reports and was restructured during Q2 2019 driving most of the realized losses of almost $9.1 million or $0.15 per share:

“The roughly $8 million realized loss this quarter has two primary components. First, a $9 million realized loss for our recapitalization of SolAero and that was primarily reversal of prior period unrealized losses. And second, a $2 million gain on an equity co-investment in imperial date.”

Product Quest Manufacturing, LLC remains on non-accrual and was written down due to “operational and liquidity challenges” and its smaller first-lien loan was added to non-accrual in Q1 2019. On a previous call, management mentioned that all lenders (including CGBD) have provided an additional credit facility to support the working capital needs and will provide updates on future calls. I am expecting Product Quest to be completely written off resulting in realized losses of $34 million or $0.57 per share but has already been mostly written off and will not materially impact NAV per share. Non-accruals accounted for around 2.0% of the portfolio fair value and $0.70 of NAV per share:

Some of the other investments that have been discussed in previous reports and/or that I am watching closely include Derm Growth Partners, PPT Management Holdings, Superior Health Linens, SPay, Inc., Legacy.com, Hydrofarm, Hummel Station, and GRO Sub Holdco. Most of these investments were marked down during Q2 2019 with the exception PPT:

It is important to note that CGBD has higher quality management that conservatively values its portfolio each quarter:

“When we held our initial earnings call as a public company back in August of 2017, I highlighted that based on our robust valuation policy, each quarter you may see changes in our valuations based on both underlying borrower performance as well as changes in market yields and that movement evaluations may not necessarily indicate any level of credit quality deterioration.”

Indra Holdings Corp. (Totes Isotoner) was its only investment with an ‘Internal Risk Rating 6’ and has been exited as discussed earlier.


This information was previously made available to subscribers of Premium BDC Reports, along with:

  • CGBD target prices and buying points
  • CGBD risk profile, potential credit issues, and overall rankings
  • CGBD 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.

TriplePoint Venture Growth (TPVG) Dividend Coverage & Risk Profile Update

The following is from the TPVG Deep Dive 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, TriplePoint Venture Growth (TPVG) beat its best case projections covering 113% of its dividend due to continued prepayment-related income driving an effective yield of 16.5% (same to the previous quarter) as shown in the following chart.

Jim Labe, Chairman and Chief Executive Officer: “Our results for the second quarter demonstrate the earnings power of our investment platform. We delivered substantial quarterly investment income, generated meaningful unrealized gains, and grew our investment portfolio for the third quarter in a row.”

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During Q2 2019, FDUS funded 17 debt investments totaling $72.5 million to 13 companies, acquired warrant investments valued at $0.7 million in 10 companies and made equity investments of $1.7 million in 5 companies. FDUS had $43 million of early prepayments. The weighted average portfolio yield on debt investments for the second quarter was 16.5%, including the impact of prepayments and other activity, and 13.7% excluding the impact of prepayments and other activity.

“During the quarter, we had $42.5 million in portfolio company prepayments, which contributed to our 16.5% overall weighted average quarterly portfolio yield. Without prepayments, our portfolio yield was 13.7%. As a lender, we’re always happy to get our capital back. Prepayments are one way and we had a meaningful amount last quarter but we’re also pleased that our portfolio generates between $2 million and $3 million of natural principal amortization per month.”

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TPVG remains underleveraged but the company will likely cover its dividend. This is part of TPVG’s business model and dividend coverage will continue to be “lumpy but positive in the coming quarters”. On a previous call, management discussed “possible increases in our dividend policy on a go-forward basis” driven by higher use of leverage and/or additional prepayments:

“Looking back, we had at least one prepay every single quarter over the past two years and 10 in the past 12 quarters. In fact, we’ve already had two here in 2019. We expect to see that pattern of one on average per quarter in 2019, and along with our expected originations and increased leverage, is something our board is taking into consideration as we consider possible increases in our dividend policy on a go-forward basis.”

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During July 2019, TPVG had only funded another $11 million of new investments but entered into another $130 million of additional term sheets. Management seems confident in the ability to grow the portfolio given the current pipeline and unfunded commitments:

“Alongside our record level investment portfolio, we have a strong backlog that provides great visibility into potential near-term portfolio growth over the next few quarters. At the end of Q2, our unfunded commitments totaled roughly $350 million to 25 companies of which $91 million is dependent upon the company’s reaching milestones before the capital becomes available to them. $162.7 million of our unfunded commitments will expire during 2019, $157.3 million will expire during 2020 and $30 million will expire in 2021, if not drawn prior to expiration.”

As of June 30, 2019, TPVG had $24 million of cash and $179 million of available capacity under its revolving credit facility for upcoming portfolio growth. On August 27, 2019, TPVG amended its Credit Facility increasing the capacity from $265 million to $300 million with an accordion feature which allows up to $400 million.

“We anticipate tapping into the accordion in Q3 as we look to lock-in additional variable rate funding capacity to take advantage of movements by the Fed. As we utilize our warehouse and lever up, we will look to use long-term debt as the way to free up capacity, diversify our balance sheet and approach one times leverage.”

In June 2018, TPVG obtained shareholder approval to reduce its asset coverage ratio to potentially increase its leverage (debt-to-equity) to a maximum of 2.00x. However, the company continues to experience early repayments and will likely remain under 1.00x.

“In general we expect and have always given guidance of one to two prepayments per quarter and it’s going to be part of our activity and part of our yields, but we always can get down to you know specific crystal ball vision next 30, 60 days necessarily. But I would say in general, there’d be a decrease if there’s not a lot of prepays.

From previous call: “In the guidance that we gave when we got shareholder approval on our expectation for target leverage, right, we don’t need to lever the business out more than 1 to 1, given the return profile of our assets. But having said that, we did say that, during periods where portfolio growth in between capital raises to optimize when we raise equity, we would expect to go north of 1 to 1 to take advantage of that in building portfolio and then waiting for prepays and for the capital markets to cooperate.”

On March 28, 2018, TPVG received an exemptive order from the SEC to permit co-investment with TriplePoint Capital LLC (“TPC”) and/or investment funds, accounts and investment vehicles managed by TPC that continues to provide opportunities for portfolio growth and diversification.

“We continue to make progress in diversifying our portfolio, thanks in part to overall portfolio growth, as well as utilization of our co-investment capabilities. Since receiving our exemptive order, TPVG has made 10 co-investments with TPC’s proprietary vehicles, and this gives us meaningful financial flexibility as we scale the business”

From previous call: “Given our strong outlook for portfolio growth, we are grateful to our shareholders for approving a lower asset coverage requirement, which will enable us to take advantage of using leverage to serve as the primary source of funding portfolio growth for us here in 2019, plus, we intend to continue to take advantage of our exemptive relief order, which we received in 2018 as well to coinvest with other entities in the TriplePoint platform and further diversify as we scale.”

Previously, the company reduced its effective borrowing rates that most recently included reducing its unused facility fees from 0.75% to 0.50%. In July 2017, TPVG issued $65 million of 5.75% notes due 2022 trade on the NYSE under the symbol “TPVY” (included in the BDC Google Sheets) with the proceeds used to refinance the previous notes “TPVZ” at 6.75% resulting in lower borrowing rates. The company ultimately issued $74.8 million of notes (includes over-allotment).

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Part of management’s optimism is related to the large amounts of VC equity capital that have been raised and will likely be leveraged using debt capital from companies such as TPVG:

“As we look ahead, momentum in our market remains strong and the demand for venture lending at venture growth stage companies continues to be brisk as evidenced by our large and growing pipeline. There’s no lack of deal flow. We plan to capitalize on this pipeline and build upon the achievements of these first two quarters of 2019, for the remainder of this year and the years well beyond. Our performance speaks for itself. This is about results, not words.”

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TPVG Risk Profile Update:

TPVG provides financing primarily to venture capital (“VC”) backed technology companies at the venture growth stage (see the end of this report), similar to HTGC and HRZN. TPVG’s portfolio includes warrant positions in high growth sectors that continues to drive NAV per share growth and/or special dividends.

“We had a notable unrealized gain this quarter from an IPO at one of our portfolio companies and we actually had another IPO within our portfolio occur as well just after the close of last quarter. The recent IPOs at CrowdStrike and Medallia greatly contribute to our unrealized gains. As of yesterday’s close Medallia’s stock price was nearly double its IPO price. Aside from these IPOs, we continue to also have positive developments in many other portfolio companies with several raising new rounds of capital or getting acquired. During Q2, we also had six portfolio companies raised over $600 million of equity in private rounds.”

As discussed in previous reports, TPVG has historically had portfolio concentration risk and management is actively working to diversify the portfolio using the ability to co-invest across the broader platform and likely one of the reasons for the previous equity offering. The top five positions currently account for around 37% of the portfolio compared to 44% in December 2018 and 57% in early 2018.

“As of quarter-end, our top five positions represented 36.5% of the total debt investment portfolio on a fair value basis, down from 50.9% in Q2 2018. We continue to make progress in diversifying our portfolio, thanks in part to overall portfolio growth, as well as utilization of our co-investment capabilities.”

During Q2 2019, NAV per share increased by 4.4% or $0.60 per share (from $13.59 to $14.19) due to $15.1 million or $0.61 per share of unrealized gains from its equity investment in CrowdStrike, Inc. (CRWD).

“As discussed earlier on the call, the mark-to-market appreciation was primarily due to price appreciation in our publicly traded equity holdings and CrowdStrike, and was somewhat offset by fair value marks across the portfolio. During the second quarter, CrowdStrike completed its IPO on June 12. It opened trading at $63.50 after pricing its IPO at $34 this year, which was above the high-end of its expected range. The company raised more in $600 million, while we are under a six month lockup period as of the end of the quarter, the unrealized gain on our investment was $18 million.”

However, the stock has pulled back recently including a 15% decline during Q3 2019 which will have an impact of around $2.8 million of unrealized losses and a negative impact on its NAV per share by around $0.11 or 0.8%. TPVG’s shares of CRWD are currently in a six-month lockup and are not tradable until December 2019.

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As discussed in the previous report, the unrealized gains from CRWD during Q2 2019 were partially offset by unrealized losses in Farfetch Ltd. (FTCH) that has continued to decline:

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Its preferred shares in Medallia, Inc. (MDLA) were marked up by $0.5 million during Q2 2019 as the company recently completed its $326 million IPO and could drive additional gains in Q3 2019 depending on stock pricing that has also recently been pulling back as shown below.

“After the close of the quarter, as I mentioned, another portfolio company Medallia, they priced an IPO at $21 a share and raised over $325 million. As of yesterday’s close Medallia’s stock price was nearly double its IPO price. Aside from these IPOs, we continue to also have positive developments in many other portfolio companies with several raising new rounds of capital or getting acquired. Since the IPO occurred prior to the publishing of the financial statements, we were able to give some factor in a little bit, the outcome of the IPO and coming up in striking as fair value mark at quarter end.”

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Credit quality declined slightly during Q2 2019, including Roli, Ltd’s ($21.4 million cost; $19.8 million FV) and Mind Candy Limited’s ($12.0 million cost; $9.7 million FV) obligations that became past due and TPVG is in the process of renegotiating the terms. Also, Roli, Ltd. and MapR Technologies, Inc. ($3.5 million cost; $2.0 million FV) were added to non-accrual status during Q2 2019. Management discussed Roli and Mind Candy on the recent call:

Q. “Question on a couple of the portfolio names downgraded Roli and Mind Candy. You footnote that part of those loan structures have become past due. On the ground level, what sort of game plan you’d have for a company, that still holds some value according to your mark but is obviously past due on the loan per se.”

A. “Generally, when there are delays in fundraising activity, we collaborate with the sponsors and be helpful where we can. And in certain situations that may be delaying payment or deferring payment and then our expectations are for either full catch up of the payment post – strategic event occurring or those may get added to principal balance. So generally that’s our rule of thumb is we may delay or defer payments during those extended periods for the rounds or the strategic processes to happen. And then once they do caught up and then occur.”

Q. “On MapR do you know – I understand that it’s in some sort of a sale process, but do you know what the residual value of the equipment that is under the equipment lease is compared to what the valuation is that you’re carrying it at the end of the quarter?”

A. “We’re financing mission critical equipment, servers, furniture, hardware, data center equipment. And so the fair value mark that we put for the quarter is our expected recovery factoring in, residual value, payments from potential M&A and things of that nature. But generally speaking, hardware residuals are anywhere from 10% to 30% of original costs if you look at the historic hardware lease financing data.”

As discussed in previous reports, Cambridge Broadband Network ($7.5 million cost; $3.9 million FV) was added to non-accrual status during Q4 2018 and was marked down again in Q2 2019. Also, Munchery, Inc. ($3.0 million cost; $2.3 million FV) remains on non-accrual status and previously downgraded to Category 5 indicating “serious concern/trouble due to pending or actual default”. Mind Candy is a video game developer for kids and was still on accrual status according to the 10-Q.

“Moving onto credit quality, the weighted average investment ranking of our debt investment portfolio was 2.03, as compared to 1.95 at the end of the prior quarter. As a reminder, under our rating system, loans are rated from one to five with one being the strongest credit rating and new loans are initially generally rated two. Mind Candy was upgraded from Orange 4 to Yellow 3 due to continued improvement in capital raising activities. Cambridge Broadband and Roli were downgraded from Yellow 3 to Orange 4 due to delays in fundraising or strategic activities as well as general performance below plan. MapR Technologies, a company where we have only equipment financing outstanding was downgraded from White 2 to Red 5 during the quarter. As reported in the press, MapR is in active M&A discussions.”

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I consider TPVG to have a safer-than-average risk profile due to mostly 1st lien positions with VC equity support. Its portfolio is 90% debt investments structured as ‘growth capital loans’ or ‘equipment financing’ and mostly backed by a senior position on all assets (see below), typically with warrants that provide upside potential. Also, almost 26% of growth capital loans are with borrowers that have other facilities in a senior position to TPVG:

From 10-Q:“Growth capital loans in which the borrower held a term loan facility, with or without an accompanying revolving loan, in priority to our senior lien represent approximately 25.5% and 14.0% of the debt investments at fair value as of June 30, 2019 and December 31, 2018, respectively.”

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A large part of the BDC Risk Profiles report takes into account the need to “reach for yield” as well as the need to grow the portfolio. As mentioned in previous reports, the company is frequently impacted by “higher-than-anticipated prepayments driving higher onetime prepayment-related income” but lower portfolio growth and dividend coverage from recurring interest income. One of my concerns is the accrual of the end of term (“EOT”) payment that ranges from 2% to 12% and provides higher effective yields as discussed earlier. EOT payments provide upside potential when loans are repaid earlier including the previous repayments from Simplivity, Inc., FuzeJet.comHayneedle, Inc., Thrillst Media Group and EndoChoice. However, this contractual payment is accrued and added to income but not paid in cash until the loan is repaid. It should be noted that there are non-cash expenses related to amortization of credit facility fees to ease concerns of non-cash portions of income.


This information was previously made available to subscribers of Premium BDC Reports, along with:

  • TPVG target prices and buying points
  • TPVG risk profile, potential credit issues, and overall rankings
  • TPVG 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.

Gladstone Capital (GLAD) Dividend Coverage & Risk Profile Update

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.