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TICC reports Q4 2014 resultsTICC reports 4th quarter 2014 results: -TII of $28.6MM or .47/share and NII of $12.8MM or $.21 per share. NII/TII = 44.8% -Investment income: $12.9MM debt, $14.5MM CLO equity, and $1.2MM all other sources -Dividend declared of .27/share, down 2 cents from the prior quarter -PIK income = $0.2MM or $.003 per share -Fee income = $1.2MM or $.02 per share -Net realized capital loss of $-7.3MM or $-.12 per share -Net unrealized depreciation of $-33.9MM or $-.58 per share -Net decrease in net assets resulting from operations of $28.4MM or $-.47 per share -NAV of $8.64 per share versus $9.40 in the prior quarter -Weighted average yield on debt instruments 7.8%, down from 8.0% in the prior quarter. -Average cost of funds ~ 3.54% -Net portfolio yield margin ~ 4.26% -Ratio of operating expenses to average net assets = 9.3% compared to 8.8% in the prior quarter -Ratio of NII to average net assets = 11.7% compared to 12.2% in the prior quarter -Number of portfolio companies = 77 (57 debt, 20 equity) -Portfolio breakdown: 70.8% in senior secured notes and bonds, 0.7% in senior unsecured notes, 26.4% in CLO equity, 1.1% in CLO debt, and 1.0% in equity -Cash on hand = $20.5MM, Restricted cash = $20.6MM -Deployed $193.8MM in the quarter ($71.9MM in existing portfolio companies, $121.9MM in new) -Received proceeds of $112.0MM from repayments, sales, and amortization payments on debt investments. -Total debt of $501.0MM or $8.22 per share -Debt to NAV ratio = 95.1%, way up from 79.6% the prior quarter -Non-accrual loans as a percent of the portfolio at cost = 1.1% -Non-accrual loans as a percent of the portfolio at fair value = 0.7% -The company has one loan on non-accrual status with a par value of $12.8MM, a cost of $11.6MM, and a fair value of $6.7MM. The loan is with Unitek Global Services which filed for Chapter 11 bankruptcy protection on Nov 3, 2014. The bankruptcy filing calls for the company’s debt to be converted to equity and the company to be taken private. -Loan portfolio debt to EBITDA ratio = N/A -Interest coverage ratio = N/A CC Q&A Jonathan Bock (Wells Fargo) – Did the company execute any trades under the company stock buyback program in the quarter? A – A limited number of shares have been repurchased. The amount will be disclosed in the 10-K. (My note: Per the 10-K, the company purchased 154,600 shares under the program at an average price of $7.58 per share or a 12.3% discount to NAV). Bock – Why wasn’t the buyback used in greater force given that this is a very shareholder-friendly use of capital? A – The program takes into account other factors such as leverage or other use of proceeds and the conditions in the market that allow us to repurchase a certain number of shares at a certain price. Bock – So is this a 10b5-1 plan? When are the purchase windows open? A – This is a 10b5 plan. Purchases are ongoing throughout the quarter at the judgment of the broker that executed the program for us and based on parameters required by the SEC. Bock – You don’t need to add leverage to buy back your stock. You can easily sell assets, not get in trouble with your leverage profile, and repurchase shares. Is this a consideration? A – Yes, we have considered it. Bock – The next question pertains to your accounting policy. You currently book all CLO distributions into income as they are earned. Why do that, given that the CLO equity return profile has a downward slope as either credit losses enter or amortization of the AAA notes increases the weighted average interest costs. So why book income as it is earned instead of using a level yield method which takes into account the interest expense as well as credit losses in modeling CLO equity returns? A – Our current method is more accurate. New CLO equity purchases pay no interest income for the first six months after primary transaction. We also typically hold very little CLO equity to maturity. We’ve held very little CLO equity past their reinvestment periods. Our true economic returns and the CLO equity strategy have more accurately mapped to the accounting recognition that we have been using. Ryan Lynch (Keefe, Bruyette, and Woods) – Of the approximately 70 cents in portfolio depreciation in the quarter what was the split between CLO equity and the overall loan book? A – This was mostly on the CLO equity side. The diminishment in CLO investments was approximately $25MM. The diminishment in loan value was approximately $7MM. Lynch – What was the primary driver of the depreciation? A – The entirety was represented by marks-to-market on the CLO equity. CLO prices were weak in the 4th quarter. Lynch – Why such a small cut to the dividend when your earnings run rate does not seem to match the payout? A – We don’t provide forward guidance on our dividend policy. We did spend part of the 4th quarter deploying the proceeds of the new debt facility with Citi which will benefit us in the 1st quarter of 2015. Lynch – Lastly, what is your current assessment for the state of the CLO equity market? A – We believe this is a good time to invest. Secondary market looks attractive. My take: OUCH!!!!!! I have been negative on this company for a few years now but this quarter’s results were so poor, even I was taken aback. NAV declined by 8% in the quarter. Evidently, the institutional investment community also has been turned off by the prospects for the company. Fewer analysts submit questions with each passing quarter. I was a bit surprised that no one bothered to inquire about the non-accrual loan to Unitek and the bankruptcy filing by that company. I would have thought someone would inquire whether TICC was on board with other creditors in the debt for equity offering currently before the bankruptcy judge. Of course, I cannot fault the analyst community for tuning the company out. Just listening to the CC, listeners get no sense of urgency from management that there is anything remotely wrong with the company’s performance. All of the numbers were simply frightening. What should scare investors the most is the net unrealized depreciation of $34MM. There is trouble brewing inside the portfolio. The Unitek bankruptcy filing may be the tip of the iceberg. Keep in mind that we still haven’t seen a meaningful rise in rates yet either. Short-term, the share price should be supported by the buyback program. The company only used $1.2MM of the authorized $50MM share repurchase program. With the share price in the mid 7’s and NAV in the mid 8’s, this is a no-brainer for the company. They could retire more than 6MM shares easily. But over the long-term, the picture is much less optimistic. The company has drastically changed its risk profile in just a few years. Three years ago, the leverage was quite modest, only about 30% compared to 95% today. The recent debt facility with Citi pushed overall leverage to extreme levels IMO and the company has less than three years before that revolving credit deal must be refinanced. Yet despite my issues with current leverage, the company inserted the following into the 10-K: Pending legislation may allow us to incur additional leverage. Under the 1940 Act, a BDC generally will not be permitted to incur indebtedness unless immediately after such borrowing the BDC has an asset coverage for total borrowings of at least 200% (i.e., the amount of debt may not exceed 50% of the value of total assets). Legislation introduced in Congress, if passed, would modify this section of the 1940 Act and increase the amount of debt that BDCs may incur by modifying the percentage from 200% to 150%. As a result, we may be able to incur additional indebtedness in the future, and therefore your risk of an investment in us may increase.
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Msg # | Subject | Author | Recs | Date Posted |
1948 | TICC reports Q1 2015 results | str8_chuter | 6 | 5/17/2015 1:14:27 AM |