Oaktree Specialty Lending (OCSL) Dividend Coverage & Risk Profile Update

The following is from the OCSL 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, Oaktree Specialty Lending (OCSL) reported slightly below base case projections with lower portfolio yield and lower-than-expected portfolio growth partially offset by higher fee income. NAV per share increased by $0.05 or 0.8% (from $6.55 to $6.60) due to overearning the dividend and net unrealized gains. During calendar Q2 2019, OCSL exited $27 million of non-core investments, including one on non-accrual, reducing non-core investments by almost 70% since September 30, 2017.

OCSL has covered its dividend by an average of 128% with average earnings of around $0.12 per share over the last four quarters mostly due to improved portfolio earnings and reduced borrowing rates. Also, OCSL’s dividend is still 47% lower than two years ago and needs to be increased as it is well below the portfolio earnings each quarter likely due to management wanting to retain earnings to improve NAV per share. The company has plenty of growth capital available given its historically low leverage with a current debt-to-equity ratio of 0.58.


As shown below, management has made meaningful progress shifting the portfolio from ‘non-core’ legacy assets that still account for around 21% of the portfolio fair value.

Edgar Lee, Chief Executive Officer and Chief Investment Officer, said, “The third quarter was highlighted by continued strong financial results and portfolio performance. NAV increased for the sixth consecutive quarter to $6.60 per share, an 11% increase over the same period one year ago, and net investment income remained solid at $0.12 per share. We made further progress in reducing risk in the portfolio, successfully exiting $27 million of non-core investments, while adding $67 million of new investments that are consistent with our late-cycle investment approach. Importantly, with leverage of only 0.58x and $330 million of dry powder, we are well capitalized and have ample capacity to invest in new opportunities.”


OCSL intends to rotate out of another $273 million of investments it has identified as non-core investments and redeploy “into proprietary investments with higher yields”.


On June 28, 2019, shareholders approved the reduced asset coverage requirements allowing the company to double the maximum amount of leverage effective as of June 29, 2019. The investment adviser reduced the base management fee to 1.0% on all assets financed using leverage above 1.0x debt-equity. Management mentioned “we have no near-term plans to increase our leverage above our target range of 0.70 to 0.85 times”:

“As you will recall last quarter, we received Board approval to increase our leverage, effective in February 2020, unless we were to receive shareholder approval before then. While we have no near-term plans to increase our leverage above our target range of 0.70 to 0.85 times, this is an opportunity cost efficiently seeks shareholder approval in the events, but in the future, we deem the appropriate to deploy higher leverage. In connection with this, our base management fee will be reduced to 1% on all assets, finance using leverage above 1.0 times debt to equity once the new leverage limits are in effect.”


Management previously amended its revolving credit facility terms including extending the reinvestment period and modifying the asset coverage ratio covenant.


As discussed in previous reports, management is working to increase NII including:

  • Redeploy non-income generating investments comprised of equity, limited partnership interests and loans on non-accrual
  • Operating cost savings from leveraging Oaktree’s platform
  • Rotation out of broadly syndicated loans priced at LIBOR + 400 or below
  • Realization of lower operating costs from credit facility optimization

OCSL Risk Profile Update:

As of June 30, 2019, 54% of the portfolio was first-lien and there were five investments that stopped accruing cash and/or PIK interest or OID income. Non-accruals increased from 6.1% to 6.4% of the portfolio fair value due to modest markups.


Also discussed earlier, NAV per share increased by $0.05 or 0.8% due to overearning the dividend by $0.02 per share and net realized/unrealized gains of $0.03 per share:


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

  • OCSL target prices and buying points
  • OCSL risk profile, potential credit issues, and overall rankings
  • OCSL 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 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, PNNT reported just below its base case projections mostly due to lower-than-expected 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.”


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.

The following table only shows affiliate’ companies and includes changes over the last nine months:


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 expected, there were 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. 

Previous call: “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.”


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).


On January 31, 2019, PNNT announced the redemption of $250 million of its 4.50% 2019 Notes due October 1, 2019. The 2019 Notes were prepaid at 100% of the principal amount, plus accrued and unpaid interest through the payment date of March 4, 2019.


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.

Apollo Investment (AINV) Dividend Coverage & Risk Profile Update


The following is from the AINV 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, Apollo Investment (AINV) reported between its base and best-case projections, covering its dividend but only due to no incentive fees paid during the quarter due to the ‘total return hurdle’. As shown in the following table, the company would have only covered 89% of its dividend if the incentive fees had been paid. This would imply that the company could have dividend coverage issues over the coming quarters depending on the progress of portfolio rotation out of non-income producing assets but also maintaining its portfolio yield and increased leverage to support portfolio growth. The Board maintained its distribution of $0.45 per share payable on October 5, 2019, to shareholders of record as of June 20, 2019.

Mr. Howard Widra, AINV’s CEO commented, “During the quarter, we had substantial portfolio growth resulting from robust origination activity. This origination activity, in a competitive market, is another indication of the strength of our origination platform. Consistent with our plan, the growth was in lower risk corporate loans which further diversified the portfolio. Also, consistent with our plan, we reduced the size of our investment in Merx Aviation to less than 15% of the total portfolio and reduced non-core assets to 17% of the portfolio. Net investment income was strong for the quarter benefiting from the net growth in the portfolio, the impact from the total return provision in our fee structure, and the catch-up income from an investment being restored to accrual status.


I was expecting at least another $4.5 million credit to the incentive fees for calendar Q2 2019 as discussed on the previous call:

“So if you kind of take that versus a $55 million number that’s kind of carrying forward, we will kind of in our next quarter have some benefit from that carryover via the incentive fee credit. So, we have $55 million and 20% of that is $11 million, $6 million or $7 million of that was credited in the first quarter. So there’s still a performance – if nothing else changes this quarter there is another $4 million to $4.5 million of benefit in the second quarter.”

However, there were additional credit issues (Spotted Hawk and KLO Holdings as discussed later) resulting in no incentive fees paid during the quarter. As mentioned in the previous report, my primary concern is the ability of the company to cover the dividends during the last half of the year.

Portfolio growth was higher-than-expected and the company repurchased 0.9 million shares at a 16% discount to the previously reported net asset value (“NAV”) resulting in an increased debt-to-equity ratio of 1.05 as the company utilizes its access to higher leverage effective April 4, 2019. The company recently amended its Senior Secured Facility increasing commitments by $70 million which increased the size of the facility to $1.71 billion. In July 2019, the company announced the redemption of its 6.875% senior unsecured Baby Bond due July 2043 and is referenced in the BDC Google Sheets.

“We continue to manage our liabilities and optimize our capital structure. We increased the size of our revolving credit facility by $70 million during the quarter and subsequent to quarter end, we announced that we would be redeeming our 2043 unsecured notes.”


NAV per share declined by $0.06 or 0.3% (from $19.06 to $19.00) due to some markdowns mostly related to non-accruals including Spotted Hawk discussed in previous reports and KLO Holdings that was added to non-accrual status during the quarter. These unrealized losses were partially offset by accretive share repurchases (adding $0.04 per share) and overearning the dividend by $0.05 per share.

Spotted Hawk was marked down by an additional $7.7 million and impacted NAV per share by around $0.11. Total non-accruals currently account for 1.7% of total investments at fair value (previously 2.4%) and 2.5% of total investments at cost (previously 2.9%). If these investments were completely written off, it would impact NAV by around $0.67 or 3.5%.


On February 6, 2019, the Board approved a new stock repurchase plan to acquire up to $50 million of the common stock. The new plan was in addition to the existing share repurchase authorization, of which $13.9 million of repurchase capacity remains. Since the inception of the share repurchase program, AINV has repurchased over 11 million shares at a weighted average price per share of $16.92 for a total cost of almost $188 million.

“We consider stock buybacks below NAV to be component of our plan to deliver value to our shareholders. We typically repurchase shares during both open window periods and we generally allocate a portion of our authorization to a 10b5-1 plan, which allows us to repurchase stock during blackout periods. Since the end of the quarter, we had continued to repurchase stock. We intend to continue to repurchase our stocks should it continue to trade at a meaningful discount to NAV.”

Since the end of the quarter, AINV has continued to repurchase stock (another 136,010 shares) with approximately $64 million available for stock repurchases (as of June 30, 2019) under its repurchase programs inclusive of the newly authorized $50 million plan:


As mentioned in previous reports, the company is in the process of repositioning the portfolio into safer assets including reducing its exposure to oil & gas, unsecured debt, and CLOs. The “core strategies” portion of the portfolio now accounts for 83% of all investments:


Its aircraft leasing through Merx Aviation remains the largest investment but is now below 15% of the portfolio and continues to pay dividend income. As mentioned in previous reports, AINV has been reducing its concentration risk including reducing its exposure to Merx. Energy, oil and gas investments account for around 5.6% of the portfolio:


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

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

THL Credit (TCRD) Dividend Coverage & Risk Profile Update


The following is from the TCRD 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 Q2 2019, THL Credit (TCRD) easily beat its best-case projections due to higher-than-expected ‘other income’ related to the repayment of LAI International, Inc. (“LAI”) combined with no incentive fees paid. As expected, there was another decline in its portfolio yield and interest income as well as a decline in overall investments but leverage remained higher. Net asset value (“NAV”) per share declined by another $0.47 or 5.2% (from $8.96 to $8.49) due to net realized/unrealized depreciation of $18.7 million or $0.58 per share. However, non-accruals have decreased from 5.9% to 1.8% of portfolio fair value due to exiting LAI but Charming Charlie and Loadmaster Derrick & Equipment remain on non-accrual status.


It should be noted that if the company had lower ‘other income’ without the benefit of the additional payment from LAI and paid an incentive fee at 17.5% the dividend would not have been fully covered. But management is waiving incentive fees through 2019 as it rotates the portfolio to full cover without waivers.


During Q1 2019, the largest markdown was its investment in LAI which was placed on non-accrual status with an investment score of “5” during the quarter. TCRD made a $10.0 million follow-on first lien senior secured term loan to LAI during Q1 2019. During Q2 2019, TCRD exited its non-accrual investment in LAI resulting in realized losses of almost $23 million or $0.72 per share but also impacted NAV per share due to exiting at a lower value.

“Repayment of certain first lien senior secured term loans in LAI International, Inc., which resulted in proceeds received of $16.8 million and an additional $4.4 million in expected proceeds which are reflected as a receivable. The realized loss of $22.7 million was largely offset by a corresponding change in unrealized appreciation and a $1.5 million exit fee was recorded as income relating to the repayment of priority loans.”


TRCD previously implemented a $15 million 10b5-1 stock repurchase plan and has been repurchasing shares “at levels that are accretive to shareholders with proceeds from exits of additional control equity positions this year”. During Q2 2019, the company repurchased 701,000 shares at an average price of $6.70 (25% discount to previous NAV). The company continues to repurchase shares:

“From July 1, 2019 through August 7, 2019, TCRD repurchased 353,986 shares of common stock for a total cost of $2.4 million as part of a 10b5-1 Stock Repurchase Plan. This brings the total number of shares repurchased since adoption of the 2019 stock repurchase program on March 11, 2019 to 1,252,987 shares at a cost of $8.4 million.”

On June 14, 2019, shareholders approved increased leverage “up to an amount that reduces our asset coverage ratio of 200% to an asset coverage ratio of 150%.”

“Once we have achieved our diversification objectives, we believe it will be accretive to our shareholders to operate with additional leverage and the 1.05 to 1.15 range. Our Board has approved putting the reduced assets coverage requirements to a shareholder vote at our annual meeting in June. If approved by our shareholders, and subject to further progress in diversifying our portfolio, and successfully – our credit facility, we intend enter these modest additional leverage commencing sometime in 2020.”

4 – The portfolio investment is performing materially below our underwriting expectations and returns on our investment are likely to be impaired. Principal or interest payments may be past due, however, full recovery of principal and interest payments are expected.

5 – The portfolio investment is performing substantially below expectations and the risk of the investment has increased substantially. The company is in payment default and the principal and interest payments are not expected to be repaid in full.

As mentioned in the previous report, the Advisor decided to waive additional incentive fees through the end of 2019, as well as to lower the base management fee to “more closely align with what it believes is appropriate for a first lien floating rate portfolio”. I believe that the new fee structure is very shareholder-friendly for the following reasons:

  • Annual hurdle remains 8% (this is important as discussed in other reports)
  • Total return hurdle remains (also important and best-of-breed)
  • Base management fee reduced from 1.5% to 1.0% (this is among the lowest)
  • Incentive fee reduced from 20.0% to 17.5%
  • Deferral of PIK and non-cash items until realized

The company has been working to re-positioning its portfolio, including reducing the amount of non-income producing equity investments to 2% of the portfolio and 82% invested into Core Assets (first-lien debt and Logan JV) with a stated goal of 90%.

Christopher Flynn, CEO: “Over the past year, we have made significant progress on our strategic objectives across four dimensions— shifting the composition of our portfolio into primarily first lien floating rate assets, reducing our concentrated positions, increasing our investment in the Logan JV, and exiting our non-income producing securities. We remain confident that the steps we are taking to reduce risk in our portfolio will result in a more diversified senior secured floating rate portfolio that is positioned to deliver more stable and predictable returns for our shareholders over the long term.”

However, this has resulted in lower overall portfolio yield as shown below:

The company continues to ramp its THL Credit Logan JV from $257 million as of December 31, 2017, to $336 million as of June 30, 2019. However, the yield recently declined from 14.1% to 11.1% as shown in the following chart:

Undistributed taxable income increased from $0.21 per share to $0.29 per share due to the previously discussed earnings results and no incentive fees paid.



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

  • TCRD target prices and buying points
  • TCRD risk profile, potential credit issues, and overall rankings
  • TCRD 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 Investment (GAIN) Dividend Coverage & Risk Profile Update


The following is from the GAIN 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 Q2 2019, Gladstone Investment (GAIN) beat its best-case projections due to higher-than-expected dividend income covering its dividends by 125% and NAV per share declined by 0.9% (discussed later). As shown below, ‘Other G&A’ (net of credits) is inconsistent and has a meaningful impact on dividend coverage.


Its secured first-lien debt of B-Dry, LLC that was previously on non-accrual with a cost basis of $11.9 million and a fair value of $0, which was converted into equity during the three months ended June 30, 2019 (still with a cost basis of $11.9 million and a fair value of $0).

During calendar Q1 2019, Meridian Rack & Pinion was added to non-accrual status and marked down an additional $1.0 million during calendar Q2 2019 and SOG Specialty Knives & Tools (“SOG”), PSI Molded Plastics (“PSI”), and The Mountain Corporation remain on non-accrual status. Total non-accruals now have a cost basis of $56.4 million, or 9.4% of the portfolio at cost, and fair value of $36.1 million, or 5.7% of the fair value of the portfolio. It should be noted that the equity positions in most of these companies have been marked down to zero fair value. If these non-accruals were completely written off, it would impact NAV per share by around $1.10 or around 8.9%.


For calendar Q2 2019, NAV per share declined by 0.9% (from $12.40 to $12.29) due to various markdowns including its equity positions in J.R. Hobbs Co. (by $8.3 million) and Galaxy Tool Holding (by $2.8 million) partially offset by overearning the dividend and various markups including Alloy Die Casting and Nth Degree, Inc.


Due to the previous repayments, GAIN has higher portfolio concentration risk with the top five investments accounting for over 38% of the portfolio fair value and 31% of investment income:

“Our investments in Nth Degree, Inc., J.R. Hobbs, Counsel Press, Inc., Brunswick Bowling Products, Inc., and Horizon represented our five largest portfolio investments at fair value as of June 30, 2019, and collectively comprised $240.4 million, or 38.1%, of our total investment portfolio at fair value.”

There is the potential for improved coverage through portfolio growth and rotating out of equity investments. As shown in the following table, the company will likely earn at least $0.215 per share each quarter covering 105% of the current dividend which is basically ‘math’ driven by an annual hurdle rate of 7% on equity before paying management incentive fees.

“The income-based incentive fee rewards the Adviser if our quarterly net investment income (before giving effect to any incentive fee) exceeds 1.75% [quarterly] of our net assets, adjusted appropriately for any share issuances or repurchases during the period (the “Hurdle Rate”). No incentive fee in any calendar quarter in which our pre-incentive fee net investment income does not exceed the Hurdle Rate (7.0% annualized)”

This calculation is based on “net assets” per share which have continued to grow driving a higher amount of “pre-incentive fee net investment income” per share before management earns its income incentive fees. As shown in the analysis below, the company continues to increase the dividend as NAV grows and increases the “Minimum Dividend Coverage”:


As mentioned in previous reports, the Board approved the modified asset coverage ratio from 200% to 150%, effective April 10, 2019. However, the company is subject to a minimum asset coverage requirement of 200% with respect to its Series D Term Preferred Stock. Historically, the company has maintained its leverage with a debt-to-equity ratio between 0.60 and 0.70 but is currently 0.52 giving the company plenty of growth capacity. The amount of preferred/common equity still accounts for 34% of the portfolio fair value (marked well above cost) which needs to be partially monetized and reinvested into income-producing secured debt.


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

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

New Mountain Finance (NMFC) Dividend Coverage & Risk Profile Update


The following is from the NMFC 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 Q2 2019, NMFC reported just above base case projections with another quarter of lower-than-expected portfolio yield and dividend income but strong portfolio growth fully covering its dividend since its IPO. The company continues to increase its use of leverage due to shareholder approval to reduce its asset coverage ratio (effective June 9, 2018) driving higher interest and total income. The Board declared a Q3 2019 distribution of $0.34 per share payable on September 27, 2019, to holders of record as of September 13, 2019.


On July 11, 2019, NMFC completed its offering of 6.9 million shares at a price of $13.68 per share. The Investment Adviser paid a $0.39 per share portion of the $0.42 per share underwriters’ sales load for net proceeds of $13.65 per share or $94.2 million. NMFC had over $240 million of originations and commitments since the end of Q2 2019through August 1, 2019, and management is expecting to fully invest in the proceeds from recent equity offering:

Robert Hamwee, CEO, commented: “The second quarter represented another solid quarter of performance for NMFC. We originated $183 million of investments and once again had no new investments placed on non-accrual. Additionally, we anticipate an active third quarter of originations, allowing us to remain fully invested after our recent equity raise.”

As predicted in previous reports and shown below, income from recurring sources (including its SLPs) continues to increase and accounted for 97% of total income in Q2 2019. However, there was a decline in the amount of income from its fully ramped its NMFC Senior Loan Program III LLC (“SLP III”):

First-lien debt increased slightly to 52.3% (previously 50.2%) of the portfolio as the company “shifted originations towards senior investments as we have accessed incremental leverage”.

On April 30, 2019, NMFC issued $116.5 million of 5.494% unsecured notes due April 30, 2024. As of June 30, 2019, the company had cash equivalents of almost $87 million and over $280 million of available borrowing capacity under its credit facility and SBA debentures.

For the fourth quarter in a row, and for 9 out of the last 10 quarters, there were no new non-accruals in the portfolio. Previously, its first-lien positions in Education Management (“EDMC”) were placed on non-accrual status as the company announced its intention to wind down and liquidate the business. As of June 30, 2019, the company’s investments in EDMC had a cost basis of $1.0 million and fair value of $0.0 million. Portfolio credit quality remained stable with only EDMC (0% of the portfolio) with an investment rating of “4”. An investment rating of a “4” includes non-accruals or investments that could be moved to non-accrual status, and the final development could be an actual realization of a loss through a restructuring or impaired sale.

Steven B. Klinsky, Chairman: “As managers and as significant stockholders personally, we are pleased with the completion of another successful quarter. We believe New Mountain’s focus on acyclical “defensive growth” industries and on companies that we know well continues to be a successful strategy to preserve asset value”

NAV per share decreased by $0.04 or 0.3% from ($13.45 to $13.41) mostly due to markdowns during the quarter that will be discussed in the updated NMFC Deep Dive report.


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

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

Institutional Investors, AFFE & Increased BDC Multiples

The following is from an update that was previously provided to subscribers of Premium BDC Reports.


The following information was discussed in the following Seeking Alpha interview last week:

Please feel free to read/comment on the public article linked above.

BDCs, like REITs almost 20 years ago, want institutional investors and the scale that comes with them. Recently, the largest asset managers including Blackstone, KKR, Carlyle, Ares, TPGFranklin Templeton, and Owl Rock have been actively entering into the sector and there will likely be positive changes to regulations over the coming quarters driving up multiples for current investors. For example, the acquired fund fees and expenses (AFFE) rules require investment companies and mutual funds investing in BDCs to include an additional line of expenses outlining the fees and operating costs charged by the BDC distorting expense ratios making them prohibitively expensive for a number of institutional investors that could have otherwise been attracted by the vehicles’ high dividend yields.

In December 2018 the SEC kicked off a consultation on a broader fund of funds reform proposal that included views on the impact of AFFE on BDCs. In September 2019, the Coalition for Business Development (“CBD”), a BDC lobby group, put forward a proposal to the existing AFFE:

“The current classification of BDCs harm institutional ownership and ‘Main Street’ BDC investments along with it,” said Joseph Glatt, chairman of the CBD. Under the CBD’s alternative proposal, a SAI disclosure would detail the BDC’s operating expenses. Any costs would be factored into the BDC’s trading price. The argument is that any expenses would be reflected in the fund’s total return. After the adoption of the AFFE rule, BDCs were delisted from multiple fund indices, including the S&P and Russell in 2014. Following the delistings, BDCs on average have traded below their net asset value and have since never fully recovered.”

Source: Reuters “BDCs increase pressure on SEC for reporting exemption

The following was from a previous call with Main Street Capital’s (MAIN) CEO:

“Currently, our focus has been directed primarily on the Acquired fund fees and expenses or AFFE rule as it affects BDCs and the special deduction for individuals that receive dividend income from REITS and MLPs. The first item we are working with the SEC to either eliminate or at least modify the rule that effectively resulted in the elimination of BDCs eligibility for index fund inclusion. The second item we are working with congressional staff to include BDC dividends as being eligible for the deduction so as to level the playing field with REITS and MLPs”

SourceMAIN CEO Vince Foster on Q2 2018 Results – Earnings Call Transcript


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.

Fidus Investment (FDUS) Update: Credit Issues & NAV Decline

The following is from the FDUS 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 Q2 2019, Fidus Investment (FDUS) reported just above its worst-case projections only covering 88% of its dividend due to lower interest and fee income as shown in the following table. The lower interest income and NAV per share were due to its non-accrual investment in Oaktree Medical Centre (discussed later).

Edward Ross, Chairman and CEO: “With M&A activity picking up in the quarter, we continued to selectively build our portfolio of debt and equity investments in high quality lower middle market companies. Of the $48 million in originations we closed this quarter, $42.9 million was invested in new portfolio companies. However, the impact of a non-accrual investment weighed on adjusted net investment income for the quarter. We wrote-off this investment as we continue to proactively manage the portfolio. Our portfolio remains healthy overall and we continue to see opportunities to monetize several of our mature equity investments.”

On July 29, 2019, the Board declared a regular quarterly dividend of $0.39 per share payable on September 20, 2019, to stockholders of record as of September 6, 2019. I will reassess dividend coverage in the updated Deep Dive report.

During Q2 2019, NAV per share declined by 1.6% or $0.26 (from $16.55 to $16.29) due to its non-accrual investment in Oaktree Medical Centre being completely written off resulting in almost $11 million in unrealized losses or $0.45 per share. Management discussed Oaktree on the previous call:

“On Oaktree real quickly, business has been in the portfolio for a while. It’s a pain management business and also a toxicology testing business. The company has experienced some stress over the years, due primarily to a drop in reimbursement rate risk for several services, but incrementally and more recently, by certain unexpected exogenous events and so, company has been making some sound progress here recently. But the unexpected events that have taken place with regard to this investment has required us to be very active in this situation and obviously the valuation reflects the current risk profile of those investments.”

As of June 30, 2019, FDUS had debt investments in two portfolio companies on non-accrual status, which had an aggregate cost and fair value of $29.5 million and $6.2 million, respectively. However, Oaktree has been completely written down and will result in realized losses of $13.4 million or $0.55 per share in Q3 2019.

Edward Ross, Chairman and CEO: “Through diligent investment selection and an emphasis on quality over quantity, we remain focused on capital preservation and generating attractive risk adjusted returns, and on our primary goals of growing net asset value over time and delivering stable dividends to our shareholders.”

On July 19, 2019, FDUS exited its debt investment in Pinnergy, Ltd. and received payment in full of $4.0 million on our second lien debt. On July 31, 2019, FDUS invested $21.5 million in an additional subordinated debt investment in Allied 100 Group, Inc., an existing portfolio company. As of June 30, 2019, the company has estimated spillover income or taxable income in excess of distributions of $0.67 per share (previously $0.73 per share) and management is expecting additional realizations in 2019:

From previous call: “We do see an opportunity for some realizations this year. It doesn’t mean it’s going to be very near term, but there are more than a couple of situations of being worked on and we’re hopeful that some of the equity is realized. It is a strategic focus of ours. We recognize as we sit here today, it’s a nice problem to having, given the equity portfolio is performing very well, but monetizing it or to the extent we have the ability to, it makes a lot of sense in certain situations. And so we plan to do what we can to help monetize some of the investments.”

As of June 30, 2019, FDUS had $22 million in cash and cash equivalents and $71 million of unused capacity under its senior secured revolving credit facility and $25 million of unfunded SBA commitments. As mentioned in the previous report, on April 17, 2019, FDUS announced that had received its third SBIC license to borrow up to $175 million in additional SBA debentures for a maximum of $350 million excluded from debt for purposes of BDC asset coverage requirements. On April 24, 2019, the company amended its Credit Facility increasing the total commitments from $90 million to $100 million, extended from June 16, 2019 to April 24, 2023, and the pricing was reduced from LIBOR plus 3.50% to LIBOR plus 3.00%. The amendment also includes an expansion of the accordion feature to $250 million.

From previous call: “Since our last earnings call, we have achieved a significant milestone with the receipt of our third SBIC license, which gives us access of up to $175 million in long term debt capital and we have also completed an amendment to our senior credit facility, which increases the commitment from $90 million to $100 million, expands the accordion feature to $250 million and extends the maturity date to April 2023.”

On February 8, 2019, FDUS closed its offering of $60 million of 6.00% notes due 2024, and subsequently, the underwriters exercised their option to purchase an additional $9 million listed on the NASDAQ under the trading symbol “FDUSZ” and included in the BDC Google Sheets along with “FDUSL”.

From previous call: “We completed a public debt offering of $69 million in aggregate principal of 6% notes due 2024, raising net proceeds of approximately $66.5 million, including the exercise of the over allotment option. As of March 31, our liquidity and capital resources included cash of $26.2 million and $90 million of availability on our line of credit, resulting in total liquidity of $116.2 million.”

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

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


Main Street Capital (MAIN) October 2019 Quick Update

The following is from the MAIN 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”).


October 17, 2019: MAIN declared its semi-annual supplemental cash dividend of $0.24 per share payable in December 2019. This supplemental cash dividend is in addition to the previously announced regular monthly cash dividends that Main Street declared for the fourth quarter of 2019 of $0.615 per share, or $0.205 per share for each of October, November and December 2019. See more details below on Transitioning the Dividend Payments.

For Q2 2019, Main Street Capital (MAIN) reported between its base and best case projections with NII per share of $0.63, covering its regular dividends by 105% with lower-than-expected portfolio growth and lower portfolio yield. Distributable net investment income was $0.67 per share for the quarter compared to regular dividends of $0.60. On April 17, 2019, the company priced its public offering of $250 million of 5.20% notes due 2024 driving slightly higher interest expense. There was a decrease in the amount of share issuances likely due to lower portfolio growth and keeping consistent leverage (debt-to-equity ratio) as shown in the following table:


Net asset value (“NAV”) per share decreased by $0.24 or 1.0% (from $24.41 to $2424.17) due to the semiannual supplemental dividend of $0.250 per share and income tax provision of $3.4 million or $0.055 per share partially offset by appreciation in its lower middle market portfolio, accretive share issuances and overearning the regular dividends during the quarter.


Dwayne L. Hyzak, CEO: “We are pleased with our operating results for the second quarter, a quarter during which the continued execution of our differentiated investment strategy and the leverage of our efficient, low cost operating structure facilitated favorable operating performance and financial results. As a result of our performance, we again generated distributable net investment income per share in excess of our regular monthly dividends, exceeding the regular monthly dividends paid during the quarter by approximately 12%. We believe that the advantages of our differentiated investment strategy and efficient operating structure, and our conservative capital structure and significant liquidity position, have us very well positioned for continued future success.”

There was a slight decline in yield from its lower middle market (“LMM”), middle market (“MM”), and Private Loan (“PL”) portfolios as shown in the following table.


MAIN remains a ‘Level 1’ dividend coverage BDC implying that it has the ability to increase and/or pay semiannual dividends. Historically, the company has grown its per-share economics year-over-year which is the primary driver for continued higher returns to shareholders. However, there was a slight decline this quarter partially due to slower portfolio growth and lower yields as discussed earlier.


As of June 30, 2019, there were seven investments on non-accrual status (up from six the previous quarter), which increased from the previous quarter to 1.5% (previously 0.9%) of the total investment portfolio at fair value and 4.4% (previously 3.6%) at cost.


Transition of Dividend Payments:

Over the next five years, MAIN will be transitioning its semiannual dividend into its monthly dividend which started in Q2 2019.

  • The previous semiannual/supplemental dividends of $0.55 per year is being reduced incrementally and fully absorbed into its monthly dividends
  • By the end of the transition period, the monthly dividend payout rate will be at least $0.05 per month higher than the current payout rate
  • This transition will make the dividend policy easier to understand and allow all third-party stock price services “to correctly indicate and reflect our dividend yield”
  • Management plans “to continue to grow our total annual dividends at a level consistent with what we have delivered in the past”

October 17, 2019: MAIN declared its semi-annual supplemental cash dividend of $0.24 per share payable in December 2019. This supplemental cash dividend is in addition to the previously announced regular monthly cash dividends that Main Street declared for the fourth quarter of 2019 of $0.615 per share, or $0.205 per share for each of October, November and December 2019. Including the regular monthly and supplemental cash dividends declared to date, Main Street will have paid $27.14 per share in cumulative cash dividends since its October 2007 initial public offering at $15.00 per share. Based upon the regular monthly dividend rate of $0.205 per share for the fourth quarter of 2019 and the current semi-annual supplemental dividend rate of $0.24 per share, Main Street’s current annualized run-rate for cash dividends is $2.94 per share. Main Street also expects that its Board of Directors will declare regular monthly dividends for the first quarter of 2020 during early November.


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

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

TSLX October 2019 Update: Continued Best-of-Breed BDC

The following is from the TSLX 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”).

————-

TSLX Dividend Coverage Update

TSLX has covered its regular dividend by an average of 134% over the last four quarters, growing undistributed taxable income and capital gains to over $1.25 per share.

“As we said before, if we believe there is sustainable increase in the earnings power of the business by operating in our target leverage range for an extended period of time, then we would look to resize our base dividend in context of the underlying earnings power of the business to ensure we’re optimizing cash distribution and satisfying risk related distribution requirements. We will continue to monitor undistributed taxable income and gains closely as part of our ongoing review of our distribution strategy.”

TSLX announced a special/supplemental dividend of $0.04 per share payable in September and annualized ROE for the second quarter 2019 was 11.6% and 17.7% on a net investment income and a net income basis, respectively.

“Our Board also declared a $0.04 per share supplemental dividend to shareholders of record as of August 30, payable September 30. This marks the 10th consecutive supplemental dividend since we introduced this framework in Q1 of 2017. To date, we have declared a total of $0.58 per share in supplemental dividend to our shareholder for an increase of 15% over our base dividend level, while also growing net asset value per share by 4% over this period.”

During Q3 2019, there will likely be around $0.13 per share of realized gains related to the exit of its preferred equity investment in Validity, Inc. that will be used to support upcoming supplemental dividends. This investment was discussed on the recent call:

“Note that the increase in the fair value mark on our convertible preferred equity investment in Validity contributed a positive $0.13 per share to this quarter’s net unrealized gain. We continue to hold our convertible preferred equity investment and updated the fair value mark to reflect the valuation from the recent equity investment. We expect to realize our investment at current fair value mark in the near term. If realized, any gains on our equity position at the time of exit would be unwound from the balance sheet and recognized into net income, but won’t flow through to net investment income.”

I am expecting a conservative amount of $0.21 per share of supplemental dividends paid in 2019 (takes into account the $0.12 per share paid in Q1 2019) which will most likely be higher, especially given the likelihood of additional realized gains. Management gave 2019 NII guidance of $1.77 to $1.85 which is likely conservative, similar to 2017/2018 guidance.

“Based on the strength of our investment pipeline, the earnings power of the portfolio and our expectations for fee-related activity for the remainder of the year, we believe we remain on pace to achieve our 2019 NII per share target of $1.77 to $1.85.”

For Q2 2019, TSLX beat its best-case projections due to much higher-than-expected portfolio growth during the quarter driving higher leverage and covering its dividend by 125%.

Repayments and exits during Q4 2018 drove its debt-to-equity to a four year low of 0.59 that has increased to 0.86 in Q2 2019 due to stronger portfolio growth.

During Q2 2019, the company increased its revolving credit facility by another $75 million that will be used to refinance its higher rate 2019 convertible notes. However, I am expecting additional unsecured notes to be issued at some point as discussed by management. It should be noted that 100% of TSLX’s borrowings are at variable rates (based on LIBOR) but the company is adequately positioned for rising interest rates due to ‘match funding’ with 100% of debt investments at variable rates. The company still has $735 million of undrawn capacity on its revolving credit facility for additional growth in 2019.

“Shifting to the right side of our balance sheet, during the quarter, we upsized our revolving credit facility by $75 million to $1.245 billion, with the addition of a new lender to our bank group. At quarter end, we had significant liquidity with $735 million of undrawn revolver capacity. Given the ample liquidity and low marginal cost of funding under our revolver, our base case is to repay the $115 million of convertible notes that mature in December with this facility. As a reminder, by swapping our fixed rate debt to floating rate, we provide net interest margin expansion for our business in falling rate environment once LIBOR dips below the floor on our portfolio.”

There was another decline in its portfolio yield (from 11.6% to 11.4%) due to new investments at lower yields.

“The weighted average total yield on our debt and income-producing securities at amortized cost was 11.4% compared to 11.6% at March 31. The decrease was primarily driven by the movement in LIBOR during the quarter on our floating rate debt portfolio.”

TSLX management continues to produce higher returns by investing in distressed companies through excellent underwriting standards that protect shareholders during worst-case scenarios including call protection, prepayment fees and amendment fees backed by first-lien collateral of the assets. Historically, higher returns have been partially driven by these strong financial covenants and call protections during periods of higher amounts of prepayments (discussed below) and worst-case scenarios (discussed at the end of this report). However, similar to previous reports, the base case projections do not include large amounts of fee and other income related to early repayments.

“Given our direct origination strategy, 99% of our portfolio by fair value was sourced through non-intermediated channels. At quarter-end, we maintained effective voting control on 83% of our debt investments and averaged 2.1 financial covenants per debt investment consistent with historical trends. And we continue to have meaningful call protection on our debt portfolio of 103.4 as a percentage of fair value as a way to generate additional economic should our portfolio get repaid in the near term.”

It also important to point out that the company is able to cover dividends with recurring sources as discussed by management on previous calls:

“As we’ve said in the past, in environments where we receive elevated levels of prepayments and a decrease in our financial leverage ratio, we would expect elevated levels of other fees. However, if repayment activity were to decline, then we would expect to leg back into our target leverage ratio, contributing more rapidly to our interest and dividend income line.”

As discussed in previous reports, Ferrellgas Partners remains its largest investment and is currently valued almost $6 million over cost or $0.09 per share and will likely drive another large special dividend.

Previous call: “Ferrellgas is a publicly-traded distributor of propane with an enterprise value of $2.3 billion. The company has a defensive core business with high return on invested capital and a strong management team but faced refinancing difficulties given the challenging regulatory environment for banks. Due to our ability to provide a fully underwritten financing solution through co-investments from affiliated funds we were able to structure a first lien last out position at a low attach point of 0.2X at a low net leverage of 1.7X with highly attractive adjusted returns.”

In October 2018, TSLX’s shareholders overwhelmingly approved the proposal to allow the company to increase leverage by approving the application to the company of a minimum asset coverage ratio of 150% effective October 9, 2018. TSL Advisers, LLC intends to waive a portion of the management fee in excess of an annual rate of 1.0% on assets financed with higher leverage and revised its target debt-to-equity range from 0.75-0.85 to 0.90-1.25.

“If we get to the 1.25 times debt-to-equity ratio, which I am not seeing we are going to get there anytime soon. Earnings per share as it’s kind of at $2.25 to $2.35 range. It feels like we are on our way. I don’t think, we’ll be at 1.25 by the end of the year. And that the sense is that, if there is churn and financial leverage, we’ll have an increase in fee income that supports our ROE.”

The table below illustrates the impact on ROEs at differing levels of leverage (debt-to-equity) with higher and lower assets yields:

“As we said in the past, in periods where we see a decrease in our financial leverage, we would expect elevated levels of other fees from repayment activity to support our ROEs. We believe our revised financial policy will allow us to drive incremental ROEs for our shareholders as we reached the higher end of our leverage target.”

“We’ve added Slide 16 to our presentation material this quarter to isolate the impact of balance sheet leverage on the earnings power of our business. The table at the top of the page shows our unit economics based on annualized results for the first quarter. Below that, the sensitivity table illustrates that for each asset level yield, holding constant operating expense ratio and increasing financial leverage corresponds to an increase in ROE. We know that this concept is relatively intuitive. So the sensitivity table is really meant to help people calibrate the magnitude of leverage on ROE for our business. Looking ahead to Q2, based on the increase in our leverage from an average of 0.66 times in Q1 to our estimate of 0.83 times today, we would expect to experience approximately 70 basis points of annual ROE expansion even if we have seen the same low level of activity-related fees and asset yields as Q1.”

The following are the investment-grade ratings from Fitch, S&P and Kroll under the new target leverage range of 0.90x-1.25x debt-to-equity.

TSLX Risk Profile Update

TSLX continues to selectively growing its portfolio using prudent amounts of leverage, onboarding higher-than-average credit quality first-lien investments at higher-than-market yields and providing better-than-average dividend coverage and returns to shareholders. As discussed earlier, TSLX has excellent underwriting standards that protect shareholders during worst-case scenarios including voting control, call protection prepayment fees and amendment fees backed by first-lien collateral of the assets.

“Given our direct origination strategy, 99% of our portfolio by fair value was sourced through non-intermediated channels. At quarter end, we maintained effective voting control on 83% of our debt investments and averaged 2.1 financial covenants per debt investment consistent with historical trends. And we continue to have meaningful call protection on our debt portfolio of 103.4 as a percentage of fair value as a way to generate additional economic should our portfolio get repaid in the near term.”

“Our portfolio’s diversification profile benefit from this quarter’s funding activity, quarter-over-quarter, the number of portfolio companies increased from 48 to 56, our average investment size decreased slightly from $38 million to $37 million and our top 10 borrower concentration decreased from 37.8% to 34% of the portfolio at fair value. We continue to be late cycle minded with our exposure to non-energy cyclical industries at an all-time low of 3% of the portfolio at fair value. As a reminder, this figure excludes our retail asset based loan investments, which are supported by liquid collateral values and are not underwritten based on enterprise value, which tends to fluctuate.”

As of June 30, 2019, 100% of the portfolio was meeting all payment and covenant requirements. First-lien debt remains around 97% of the portfolio and management has previously given guidance that the portfolio mix will change over the coming quarters with “junior capital” exposure growing to 5% to 7%.

During Q2 2019, TSLX’s net asset value (“NAV”) per share increased by $0.34 or 2.1% (from $16.34 to $16.68) due to overearning the dividends by $0.07 per share after excluding excise tax, unrealized gains on its interest rate swaps of $0.09 per share and $0.19 per share of changes in portfolio valuations including Validity, Inc. discussed earlier and Ferrellgas Partners, L.P. (FGP) together accounting for around $0.17 per share of unrealized gains:

There were some additional markdowns in the three ‘watch list’ investments Mississippi Resources, Vertellus Specialties, and IRGSE Holding Corp. but mostly related to the equity positions as shown in the following table. However, its first-lien position in Mississippi Resources was marked down to 92% of cost and needs to be watched:

“The difference between this quarter’s net investment income and net income was primarily driven by net unrealized gains specific to individual portfolio companies and net unrealized mark to market gains related to our interest rate swaps given the change in the shape of the forward LIBOR curve.”

It is important for investors to understand that one of TSLX’s strategies for higher IRRs is investing in distressed retail asset-based lending (“ABL”) as “traditional brick and mortar retail gives way to the rise of e-commerce”. Historically, borrowers have paid amendment fees to avoid even higher prepayment fees if they decided to refinance. Also, the amendments included an additional “borrowing base” providing increased downside protection on the investment. This strategy continues to drive higher fee income including prepayment and amendments fees. See the end of this report for previous examples.

“Retail ABL continues to be one of our various themes given the ongoing secular trends in our platform’s differentiated capabilities and relationships in this area. As the direct lending asset classes become increasingly competitive, we have continually developed and evolved our investment themes in order to generate a robust pipeline of strong risk-adjusted return opportunities.”

“This quarter’s portfolio activity highlights the distinct competitive advantage that our platform offers from a sourcing and scale perspective. Let me take a moment to provide a few examples. We were active on our retail ABL team during the quarter with new investments in Barneys, Maurices and Sable. Together, these three names comprise $200 million of originations, $85 million of which were allocated to affiliated funds or third parties. As we’ve said on our previous earnings calls, we continue to like being a solution provider in this space, given the ongoing secular trends from brick and mortar retailers and our platforms’ human capital expertise. Inclusive of this quarter’s repayment of the Payless DIP loan, we’ve generated an average gross unlevered IRR of 22% across our fully realized retail ABL investments.”

From previous call: “What really matters is, how we think the inventory will liquidate as it compares to what – where we are lending against it. Retail goes as well as the consumer. That is not the – that’s not what’s happening here, right. Consumer is in good health. There is a business model issue and a structural issue with retail, but more so given the fixed cost base and given the discerning mediation of both kind of fast brands and plus Amazon and omni-channel business models. And so, it’s really the liquidation value of inventory and the liquidation value of the inventory has held up great. So, we continue to hope for a decent amount of structural change. So we can provide capital and provide – be a solution provider into that space. And quite frankly, the liquidation values continue to hold up very, very, very well.

Similar to investing in distressed retail assets, the company is focused on increasing returns through investing opportunistically in oil/energy but only first-lien “with attractive downside protective features in the form of significant hedged collateral value at current price levels”. Management has mentioned that energy exposure would not exceed 10% of the portfolio and only first-lien using appropriate hedges. TSLX made “opportunistic” investments in Verdad Resources in Q2 2019, MD America Energy during Q4 2018, Ferrellgas Partners during Q2 2018 and Northern Oil & Gas in Q4 2017 that was previously repaid.

“Another transaction this quarter that highlights our platform’s capabilities is the $225 million term loan facility that we sold at an agent for the Verdad Resources, an upstream E&P company with primary operations in the DJ Basin. This opportunity was sourced with our energy team and coincided with our opportunistic approach of providing first lien reserve based loans to upstream companies situated low on their cost curves at current price levels. Our platform sector expertise and ability to act in size allows us to structure a customized one-stop solution for the company and its sponsor at pricing in terms that provide a strong risk return profile on our investment. Inclusive of the $42.2 million par value loan that we funded for Verdad, our portfolio’s total energy exposure of the quarter remained low at 3.8% of portfolio at fair value.”


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

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