There were three items up for vote. Two Directors were re-elected, the auditor was approved. The key item was the approval to allow the BDC to increase its leverage / reduce its asset coverage as permitted under the Small Business Credit Availability Act. The vote was an overwhelming yes, except for the equally overwhelming number of "broker non-votes", which suggests many shareholders are not getting involved in the process of allowing GBDC to "leverage itself up". This makes GBDC the 18th BDC to explicitly get approval from shareholders.
MCC: Here is the direct link to the hundreds and hundreds of pages that are the MCC Proxy : https://bit.ly/2SoH5yN. Unbelievably we've read all the juicy parts and recommend shareholders take a clear-eyed look at pages 330-360, where pro-forma balance sheet and income statement numbers are finally shared. There's a huge amount of data in there and every assumption deserves testing in what are pro-forma numbers. What we see is a combined entity that pays out half of its available cash to MDLY as part of the transaction and $1.6bn of portfolio investments (not incl MDLY's assets) and over $800mn in debt. We'll let everyone draw their own conclusions. We can confirm, though, that many, many investment bankers and law firms have been involved in setting up this strange merger and it's reflected in the Proxy. Or, in other words, it's almost impossible to tell what's going on.
HTGC: On December 6, 2018 shareholders will get to vote on whether the BDC should adopt the lower asset coverage/higher leverage limits allowed under the Small Business Credit Availability Act. If approved, HTGC will be the 12th BDC to receive shareholder agreement, which allows immediate implementation of the new limits. We calculate that given the stated Leverage Target of 1.25X of regulatory debt to equity, this will allow HTGC to increase total assets by $589mn, or 34% and total debt outstanding by 73%. Or, in other words, a momentous decision.
MCC: Medley Capital shuts down its Revolver. The BDC Reporter does not like how this looks before a key shareholder vote. See the article.
MVC: The BDC filed an Annual Proxy with two items up for a shareholder vote, scheduled for October 30, 2018. One is a routine approval of Grant Thornton as accountant for the BDC. The second is the bulk approval of 8 directors to a new term of duty. One director - at the behest of an "activist" - has been added to the Board. This is the highly qualified (as we saw in the bio) Scott Krase, a "founder" of "Oak Hill Advisors". The BDC Reporter questions if a small sized BDC struggling to be consistently profitable needs that many directors at $70K-$90K a pop. However, as the Proxy shows, since November 2017 Board members have agreed to a 25% discount to fees paid till the BDC trades 10% or less below book value. That's unlikely to happen any time soon, so that's a real savings to the BDC and shareholders of over $50,000 a year, net of the new addition. This is a hard working group, with 16 meetings last year, with 90% attendance. We're not fans of having the CEO serve as Chairman of the Board and have mixed feelings that a couple of "independent" Directors have outsized ownership positions in MVC (Phillip Goldstein and Robert Knapp). Does that bring about alignment with "regular" shareholders or not ? We're not sure. Of course, the $64,000 question is what the directors of the BDC, as well as the large shareholders listed in the Proxy (including the famous Leon Cooperman), are going to do about the perennial discount of MVC's stock price to book. A stock buyback program of $15mn has been announced through 2019, but will that make a meaningful difference? The BDC Reporter - in an earlier Premium article - is on the record as having severe doubts whether that kind of financial engineering (tried multiple times) will be sufficient to make a difference. What is needed is a determined attempt to sell off at whatever the real market price is of the BDC's multiple (and mostly ailing and cash draining) equity investments. That will give shareholders a truer picture of what MVC is really worth (and we worry that the impact might be a big drop in book value) and provide the capital to allow management to complete the shift into yield bearing investments. That's a shift that's been promised for many years but has gotten stuck long before completed, leaving MVC unprofitable on a consistent basis and facing periodic (and understandable) shareholder revolts. Unfortunately, MVC rarely holds public discussions with shareholders and analysts to discuss these matters. In the absence of any constructive alternatives we recommend an affirmative vote on both items in the Proxy but overall the BDC continues to be - the election out of the blue of Mr Krase and the announced buyback programs notwithstanding - a mostly "shareholder unfriendly" BDC. We suggest shareholders keep a close eye on the BDC's SEC filings (and the BDC Reporter) to keep up with the twists and turns of corporate governance rather than relying on forthright discussion and communication from the Investment Advisor and the Board, which is often lacking at critical junctures.
CMFN: The BDC has set November 6 to vote on two items. The first is the election of two directors. The second - and more controversial - is to permit the BDC to raise equity at a price below NAV.
SUNS: Besides the routine re-election of a Director, SUNS shareholders approved both issuance of stock below book and adoption of the SBCAA.
HRZN: A shareholder vote is scheduled for October 11, 2018 to vote on the proposed increase in leverage from 1:1 to 2:1 and a reduction in the Management Fee over a threshold level.
HTGC: In a surprise move HTGC announced that its Board had approved the lower asset coverage limit of 150% allowed under the Small Business Credit Availability Act, which becomes effective this time next year. In addition - on December 6- the BDC will seek shareholder approval of the move. However, the press release indicated HTGC will be targeting a maximum leverage level of 1.25x equity versus 2.0x allowed under the Act. A Proxy is to follow, at which point we will review the pros and cons more fully.
WHF: We make a correction to an article we wrote about how WhiteHorse Finance is tackling manager compensation following shareholder approval of higher statutory leverage. First article published August 14, 2018 and the correction on September 3, 2018.
CMFN: In a newer feature at the BDC Reporter we review - with shareholders upmost in our minds - CM Finance's preliminary Proxy and the two items that are up for a vote.
TSLX: The BDC Reporter de-constructs the pro and cons of TPG Specialty's shareholder vote on higher leverage.
HRZN: The technology BDC is calling a special meeting to allow shareholders to vote on increasing leverage to 2.0x equity from 1.0x currently. In return, the Investment Advisor has agreed to reduce its Management Fee from 2.0% of assets to 1.60% for amounts over $250mn in assets. The June 30, 2018 statements show $233mn in total assets, less cash. The BDC Shareholder adds: HRZN already has the highest level of management fees charged by a BDC. This reduction to 1.60% is very modest. (Why not a round 1.50% or a 0.50% reduction as others have done ?). Given that HRZN has a hard time building up its portfolio in the best of times and recently set up a off balance sheet JV, we don't expect much material savings from this measure in the next 12 months, if at all.
GARS: The BDC reported that the Board and Investment Advisor had agreed to a revised fee structure should GARS exceed the prior regulatory limit for leverage: "The Fifth Amended and Restated Investment Advisory Agreement, which is effective beginning as of August 14, 2018, modifies the base management fee payable to the Adviser to an annual rate of 1.50% of the Company's average gross assets, excluding cash or cash equivalents but including assets purchased with borrowed funds, at the end of each of the two most recently completed calendar quarters; provided, however, the base management fee will be calculated at an annual rate of 1.00% of the average value of the Company’s gross assets, excluding cash or cash equivalents but including assets purchased with borrowed funds, that exceeds the product of (i) 200% and (ii) the Company’s average net assets at the end of each of the two most recently completed calendar quarters. For the avoidance of doubt, the 200% will be calculated in accordance with the 1940 Act and will give effect to the Company’s exemptive relief with respect to SBIC debentures". The BDC Shareholder adds: This is a modest concession to shareholders from the Investment Advisor and unlikely to reduce any fees for some time as the BDC leverages up to the prior limit. However, it's in line with what a number of other BDCs are offering up.
TSLX: The private-equity backed BDC has joined many of its peers in seeking shareholder approval to move the goalposts of its leverage. In this case, TSLX is promising to limit debt to equity to a maximum of 1.25x versus a statutory level of 2.0x. Moreover, the Investment Advisor - like GARS and ARCC - is offering to reduce its management fee on assets acquired with debt that causes debt to equity to exceed 1:1. The Management Fee will be reduced from 1.5% to 1.0% on the incremental assets.( Note - as the Preliminary Proxy reminds us - that TSLX charges a 1.5% fee on assets held in cash). No date has yet been set for the special shareholder vote, which is likely to be approved. The BDC Reporter is a shareholder in TSLX. Typically we are not favorable to higher leverage but the modest (in a relative sense) increase involved; the fee concession (albeit off marginal benefit) and the BDC's history to date of thoughtful portfolio construction and low credit losses results in our being in favor of the proposal. We're optimistic that the higher leverage will also result in meaningfully higher earnings, which are likely to result in bigger Special distributions or even an increase in the regular quarterly payout, which has remained unchanged for 16 quarters in a row.
AINV: The AINV Advisory Agreement was renewed except for a small change to how management fees are calculated to ensure the MF does not increase unduly if assets increase late in a quarter. The new arrangement will be modestly shareholder favorable. Read the 8-K for details.
GAIN: On August 9, 2018 GAIN held its annual Shareholder meeting. Two issues were up for vote: a routine approval of an interested Director, which was approved. More importantly, a resolution giving permission to allow the BDC to raise equity below book value for the next year was overwhelmingly approved. The BDC Reporter - which owns the Term Preferred - is not a fan of these "blank cheques". From a practical standpoint, with the stock trading at a 4% premium to book any issuance is likely to be at a premium or thereabouts. Of course, the risk is that the Gladstone organization is not shy to raise capital at a discount at times and should market conditions change a below book issuance between now and next year is not out of the question. The optimistic mood in the BDC sector and at GAIN - which has been on a hot streak - is such that most shareholders - as the vote shows - hardly care. However, conditions and sentiment can turn on a dime (an expression which we use but do not understand). Moreover, as management constantly admits, even the lower middle market is overheated right now and good deals are hard to find. What's more GAIN ha adopted the new lower asset coverage/higher leverage standard as of April next year, giving them plenty of access to capital if needed. This is gilding the lily, but an action many (but not all) BDCs take to have as many options as they can in their pocket to undertake future actions without consulting shareholders.
GARS: We are not shareholders in GARS but note that the BDC is actively reminding its shareholders of a Proxy filed July 12 and coming up for a vote on August 14. The only subject is asking shareholder approval to reduce asset coverage/increase leverage under the Small Business Credit Availability Act. The BDC Reporter adds: We don't recommend shareholders for the new proposal, but chances are they will, given what's happened elsewhere on votes of this kind. We note that GARS is already leveraged above 1:1 thanks to its SBIC license, whose debt does not count against the regulatory limit. Moreover, the BDC has not imposed any constraint on itself beyond the new 2:1 debt to equity limit should the approval be received. Technically that will allow GARS to add $193mn in assets and the same in debt to the $393mn of investment assets and $235mn in debt already in existence. At most (and assuming another $10mn increase in SBIC debt-which is also possible) that would take total assets to $596mn on an equity base of $185mn at FMV on March 31, 2018 . Unfortunately to date GARS credit performance has not been reassuring. Realized and Unrealized Losses - virtually all the former - have amounted to ($69mn), equal to 28% of par equity capital. For the type of loans GARS makes, we typically assume 2% in annual average write-offs a year or 10% over 5 years. That suggests (and using a 1.8x multiple for ACTUAL debt to equity) we estimate additional losses could be $56mn over the next half decade. That would reduce book value by ($3.5) per share and (very roughly speaking) income by ($0.30) per share annually. Effectively that would reduce the current value of GARS by a third. The current recurring EPS is $1.24 and the dividend $1.12. The only positive worth noting is that GARS offers to reduce - as many other BDCs have done - its Management Fee to 1.0% for assets over the prior regulatory limit. To our mind that modest concession is not worth the extra risk.
TSLX: In advance of filing a Proxy to adopt the higher leverage allowed under the Small Business Credit Availability Act, TSLX published these comments from the latest Conference Call on the subject. The BDC Reporter adds: We are shareholders in TSLX in our Long Term Income strategy. Whether one is for or against higher leverage at TSLX, the discussion held during the IIQ 2018 Conference Call is the most thoughtful we've seen and should help shareholders decide. Given the 1.25X limit; the excellent track record of TSLX to date; the lowered management fee and the relatively cost of debt capital the BDC attracts, we expect to vote YES on the higher leverage, subject to a review of the final Proxy.
SAR: Only item up for vote is re-electing CEO Oberbeck to the Board. The BDC Reporter adds: We are shareholders in SAR. We will be voting FOR Mr Oberbeck's re-election, even if we would prefer - both for SAR and all other BDCs - to see the Chairman role on the Board given to an independent director.
GAIN: The BDC faces the difficult task of getting enough shareholders to vote on this year's shareholder issues to have a quorum. With time running out GAIN has "adjourned" the August 2 meeting, which gives the proxy solicitation firm employed by the Advisor - but paid for by the BDC itself - to get more investors to vote. The BDC Reporter adds: We are not currently a shareholder in GAIN but are shareholders in all 3 Term Preferred issues. The key issue of two on the ballot is getting approval from shareholders to sell stock below book value, a perennial request of the Board and Advisor. This year GAIN is trading at a premium to book so the need for the blank cheque is lower but GAIN is asking anyway. We have voted AGAINST the proposal. As always in these situations, we are against shareholders giving away a key protection of the BDC model (forbidding BDCs from issuing stock below book value) and without any pre concession from the Manager. Moreover, with the new asset coverage rules kicking in within a few months, the risk of GAIN breaching the BDC leverage tripwire (often listed as a reason to allow the Advisor to raise fresh capital at a discount) is very low. Finally, we note that the Board and Advisor have chosen to call a shareholder vote on issuing stock below book but have not given shareholders a direct voice in the decision to adopt the lower asset coverage provisions of the Small Business Credit Availability Act, which will be kicking in - whatever shareholders want - in 2019. Because of provisions in the Term Preferred that require 200% asset coverage, GAIN will be forced to redeem all 3 of its Term Preferred issues and re-borrow in some form in the months ahead at great cost to shareholders. Moreover - unlike some other BDC Managers - the GAIN Investment Advisor has not proposed any fee concession to shareholders as part of the higher leverage to be adopted from 2019.
WHF: The mid-sized BDC put three items to a shareholder vote. Two were routine ( a director approval and the blessing of the independent accountant) and were approved. Also approved - and by a wide margin - was the immediate adoption of the lower asset coverage/higher leverage allowed under the Small Business Credit Availability Act. As discussed on the Conference Call, WHF has set itself an unofficial - and non binding - leverage limit of 1.25x debt to equity. That could grow asset size by $137mn, according to management. That would represent a 27% increase in total assets and a 64% increase in total debt. (When we calculated the numbers, the asset increase was $166mn. We can't account for the difference).