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CPTA reports ugly, slimy Q3-17 What's the difference between ugly slime and regular slime? Regular slime is continuing an ugly practice - like taking a non-accrual loan and making it an equity investment. Ugly slime is trying to put a positive spin on it. One of the three highlights for the quarter --- "Reduced non-performing investments from 18.0% at June 30, 2017 to 12.6% at September 30, 2017, on a cost basis " --- and that sound great. But keep on reading, and you find out the slime. During Q3-17, CPTA's NAV fell from $14.97 to $14.21 --- a fall of 5%. Here is the positive spin: During the quarter, the Company realized losses on Sierra Hamilton, LLC ($7.1 million), CSM Bakery Solutions, LLC ($1.3 million) and Kelle’s Transport Service, LLC ($3.5 million), partially offset by a $1.5 million gain related to B&W Quality Growers, LLC and $0.1 million in other realized gains. The losses realized on Sierra Hamilton, LLC and Kelle’s Transport Service, LLC were related to restructurings during the third quarter of 2017, did not negatively impact our net asset value, and enabled us to reduce non-accrual balances. Here is a hypothetical that matches with the above numbers. Someone started with a loan to Sierra Hamilton that was worth $14 million. The loan goes non-accrual. You write down the loan by half in a prior quarter - creating unrealized depreciation of $7 million during that prior quarter. Then in Q3 you make the $7 million loan a $7 million equity investment with the stoke of a pen. That transfer from debt to equity makes the prior markdown an actualized loss. And the transfer has no impact on NAV during Q3. At the same time, an investment in debt in a company that can not pay a loan is probably not a better investment because it is not equity. The CPTA numbers:
That is a world class ugly history. If one were trying to lose money, it would be a bit hard to do worse.
There are ugly trends in NAV, NII, dividend coverage and the NII/TII ratio. Another trick to reduce non-accruals is to convert a "10% loan" to a "5% loan with a 5% PIK" (which would cut the interest owed per quarter in half - making the loan easier to pay for the troubled company to which you have lent funds). I wanted to track "Non-accrual PIKs", but the reporting transparency is somewhat lacking - and I am having trouble with that task.That is why there are two lines for non-accruals . . . and why 'the second one' of the lines in mostly empty.
Two test questions What is worse that lending money and not getting paid back? When you borrow the money that you are lending. What is worse than lending borrowed money and not getting paid back? When the cost of the money you borrowed is very high. When a BDC has reported these kinds of numbers - they have done something ugly. But when they report these numbers while telling us "We reduced non-accruals without taking a hit to NAV" - they have done something ugly and slimy. |
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Msg # | Subject | Author | Recs | Date Posted |
2717 | Re: CPTA reports ugly, slimy Q3-17 | rlp2451 | 0 | 11/7/2017 7:30:37 AM |