Financial Services Sector Expertise
The Financial Services sector is a key vertical for National, with a team of banking professionals highly regarded for their deep industry expertise and relationships. Our investment banking activity in this sector mainly includes privately held and publicly traded BDCs, specialty lenders, mortgage REIT’s, investment funds and SPVs focused on equity and debt investments providing competitive yields in a low interest rate environment.
In the past six years, National has led or participated in 100+ transactions including private placements, IPOs, Follow-Ons, CMPOs, RDOs, PIPEs, M&A, and financial advisory.
Financial Services Sector Coverage
National has a robust and diverse coverage of financial institutions companies with a particular focus on Business Development Companies (BDCs) and Registered Investment Companies (RICs).
BDCs in particular have grown in number, size, and popularity as US banks have come under increasing regulatory pressure that has curtailed their lending activities and permitted non-bank lenders to thrive in their place. We believe that through independent portfolio analysis, manager selection, assessment of accounting practices, and an examination of capital management policies, investors can continue to find attractive opportunities in the space.
Apollo Investment Corp. (AINV: Neutral, $18 PT)
May 20, 2019– AINV posted NII/share of $0.46 for F4Q19, a penny above both our estimate and the quarterly dividend. With the total return hurdle taking effect, the company did not earn an incentive fee. NAV/share was up 3 cents Q/Q to $19.06 but down 3.1% on the fiscal year from $19.67. Unrealized depreciation was led by Glacier with $17.0mm, Crowne Automotive with $7.1mm, Renew Financial with $6.6mm, and Dynamic Product Tankers with $6.3mm.
Ares Capital Corp. (ARCC: Buy, $20 PT)
May 1, 2019– The strong portfolio growth for ARCC also drove a significant core NII/share beat of $0.48 versus our estimate of $0.42. Notably, the heavy origination volume drove capital structuring service fees of $45.0mm on the quarter compared to our estimate of $26.7mm. Through 4/24 ARCC had $183mm of commitments compared to exits and repayments of $747mm with a backlog of $1.1 billion and pipeline of $195mm.
Barings BDC Inc. (BBDC: BUY, $13 PT)
May 13, 2019– Barings posted NII/share of $0.16 for 1Q19, flat with the prior quarter and shy of our estimate of $0.18. Notably, the portfolio was 74% BSL compared with 79% Q/Q. We had expected a more rapid rotation out of BSL and into MM originations.
Capital Southwest Corp. (CSWC: Buy, $24 PT)
June 5, 2019– CSWC posted core NII/share of $0.42 for the quarter, matching our estimate. The quarterly base dividend was bumped up a penny per share to $0.39/share from $0.38/share previously. As a reminder, the company is paying a $0.10/share supplemental dividend each quarter in addition to the base dividend. CSWC ended F2019 with UTI/share of $1.14, meaning that even if Media Recovery wasn’t monetized and there was no further UTI build through NII in excess of dividends that the company could pay the supplemental dividend for over 10 more quarters.
Eagle Point Credit Company (ECC: Buy, $24 PT)
May 23, 2019– ECC posted EPS (NII+realized gains per share) of $0.36 compared to our estimate of $0.45 while portfolio cash distributions (PCD) per share were $1.17 compared to our estimate of $1.80. PCD fell short primarily due to lower inaugural distributions than we had modeled. Three loan accumulation facilities (LAF) were converted during the quarter for a total of $36.1mm. We expect this to have a more pronounced effect on cash flow in 2Q19.
FS Investment Corp. (FSIC: Buy, $10 PT)
November 12, 2018– FSIC earned adjusted NII/share of $0.23 for 3Q18 compared with our estimate of $0.21 and the quarterly dividend of $0.19/share. The incentive fee was not earned on the quarter as non-accruals at cost increased to $210.4 million or 5.7% of the portfolio from $22.7 million or 0.6% of the portfolio Q/Q.
FS KKR Capital Corp. (FSK: Buy, $10 PT)
May 13, 2019– For 1Q19 FSK earned adjusted NII/share of $0.18, a penny short of both the quarterly dividend and our estimate. The portfolio at cost increased to $7.79 billion from $7.76 billion Q/Q as the company had $549mm of originations versus $510mm of sales and redemptions.
Garrison Capital Inc. (GARS: Neutral, $8 PT)
May 14, 2019– GARS earned adjusted NII/share of $0.20 for 1Q19, a penny short of our estimate but also short of the $0.23/share quarterly dividend. Given what we expect will be continued pressure on asset quality and marks, we think this will further constrain portfolio growth and thus NII.
Gladstone Capital Corp. (GLAD: Sell, $7 PT)
May 3, 2019– GLAD’s portfolio at fair value declined to $387.7mm from $431.2mm Q/Q. Originations were light at around $4.0mm while prepayments came in at $48.5mm on the quarter. We expect the significant prepayment activity drove both prepayment fees as well as accelerated unamortized original issue discount (OID). Despite the portfolio shrinking, total investment income increased to $12.5mm from $11.9mm Q/Q.
Goldman Sachs, BDC, Inc. (GSBD: Buy, $22 PT)
May 13, 2019– Goldman had a $24.7mm realized loss on the quarter, driven by the restructuring of former non-accrual ASC. At 12/31/18, ASC had $14.5mm of unrealized depreciation. Non-accruals at cost decreased to $76.2mm or 5.2% of the portfolio from $129.3mm or 9.1% of the portfolio Q/Q. The largest non-accrual with a cost of $56.0mm, NTS Communications, is slated to be sold pending approval from the FCC. We are unsure of what the timing will ultimately be, but Goldman is confident from conversations with the FCC that they have no reason to deny the sale of the firm.
Golub Capital BDC. Inc. (GBDC: Buy, $22 PT)
May 13, 2019– GBDC posted core NII/share of $0.32 for F2Q19, in-line with both our estimate and the quarterly dividend. Golub’s portfolio at cost grew to $1.95 billion from $1.92 billion Q/Q as originations of $115.2mm outpaced repayment activity of $80.3mm. In F1H19, repayment activity slowed to $143.9mm compared to $207.8mm in F1H18 which has assisted the company in achieving net portfolio growth.
Horizon Technology Finance Corp. (HRZN: Neutral, $11 PT)
May 2, 2019– Horizon posted NII/share of $0.28 for 1Q19, below our estimate and the quarterly dividend of $0.30/share. Total repayments dipped to $18.6mm on the quarter compared with $37.9mm Q/Q which caused a drop in prepayment income, although increases in other fee income provided somewhat of an offset to this.
Main Street Capital Corp. (MAIN: Neutral, $38 PT)
May 13, 2019– Main Street posted NII/share of $0.64, a penny above our estimate and comfortably above the regular quarterly dividend of $0.60/share. For 3Q19, the base dividend was increased to $0.615/share. As a reminder, MAIN has begun to gradually scale down the semiannual special dividends and to steadily increase the regular dividends, a process they expect to be completed over a five-year period.
Monroe Capital Corp. (MRCC: Neutral, $13 PT)
May , 2019– MRCC posted adjusted NII/share of $0.35 for 1Q19, well below our estimate of $0.41 but matching the quarterly dividend. The company waived $281K of incentive fees during the quarter and without this waiver adjusted NII/share would have been $0.33/share and would be short of the dividend.
Oaktree Specialty Lending Corp. (OCSL: BUY, $7 PT)
May 13, 2019– OCSL’s NAV/share was up 5.9% sequentially Q/Q to $6.55 from $6.19. We had forecasted NAV/share to finish 3/31/19 at $6.42. The sale of Maverick above prior quarter marks and reversal of technical marks due to spread compression in the quarter gave NAV a significant lift.
OFS Capital Corp. (OFS: Buy, $15 PT)
May 6, 2019– For 1Q19 OFS earned NII/share of $0.36, two cents above our estimate and the quarterly dividend of $0.34/share. The company had $63.6mm of originations versus repayments of $6.0mm and sales of $16.3mm, driving the portfolio at cost to increase to $439.0mm from $413.3mm Q/Q.
Oxford Square Capital Corp. (OXSQ: Sell, $5 PT)
May 6, 2019– Oxford posted core NII/share of $0.20 compared to our estimate of $0.19. The core NII is, as expected, far lower than 4Q18 when market dislocation increased core NII to $0.34 per share. As a reminder, we add back CLO equity cost reductions (which is cash flow in excess of GAAP effective yield assumptions) to NII to arrive at our core figures. This dipped to $1.4mm (compared to our estimate of $1.2mm) from $7.9mm the quarter prior.
Prospect Capital Corp. (PSEC: Sell, $4 PT)
May 14, 2019– For F3Q19, PSEC posted NII/share of $0.21 versus our estimate of $0.19 and the quarterly dividend of $0.18/share. Dividend income came in at $4.5mm, below our $7.8mm estimate although other income was well above our estimate of $3.8mm at $11.5mm. As a reminder, last quarter, PSEC paid itself an amendment fee on its loan to NPRC, a company it controls. You can’t make this stuff up.
Saratoga Investment Corp. (SAR: Neutral, $24 PT)
January 15,2019– For fiscal 3Q19, SAR posted adjusted NII/share of $0.65 versus our estimate of $0.61 and consensus estimates of $0.62. The earnings beat was largely attributable to significant originations of $73.7mm of which half of the origination fees are recognized up-front.
Solar Capital Ltd. (SRLC: Buy, $25 PT)
May 8, 2019– SLRC earned $0.44/share of NII for 1Q19, a penny shy of our estimate but comfortably above the $0.41/share quarterly dividend. The dividend is being comfortably out-earned even with a balance sheet that is underleveraged with minimal prepayment-related income (both fees and acceleration of unamortized OID). This leads us to expect an increase in the quarterly dividend by a penny per share both in 2019 and 2020 with payout ratios remaining conservative.
StoneCastle Financial Corp. (BANX: Buy, $25)
May 6, 2019– StoneCastle earned NII/share of $0.38 for 1Q19, matching the dividend but missing our estimate of $0.42. Redemption activity was significant during the quarter at $19.5mm compared to only $428K in 4Q18. Originations were a minimal $1.5mm. As a result, the portfolio at fair value shrank to $173.1mm compared to $189.1mm Q/Q. Management noted that debt offerings are down 48% Y/Y for all US banks and during the quarter only six sub debt deals closed in the market raising roughly $200mm.
TCP Capital Corp. (TCPC: Buy, $18 PT)
March 4, 2019– For 4Q18, TCPC earned NII/share of $0.40, shy of our $0.43/share estimate but well above the $0.36/share quarterly dividend. NAV/share was down to $14.13 from $14.51 Q/Q and from $14.80 Y/Y. During the quarter, AGY was written down by $3.4mm, Green Biologics by $8.2mm, and Kawa Solar by $2.1mm for combined depreciation of $13.6mm. As noted last quarter, the only non-accrual, Real Mex, was exited in 4Q18. This was a legacy investment from before TCPC had its IPO. The company realized a loss of $25.8mm on Real Mex for 2018 and also had a $4.1mm realized loss on the exit of Globecomm.
THL Credit, Inc. (TCRD: Neutral, $7 PT)
May 13, 2019– We had previously estimated a quarterly dividend reduction to $0.17/share in 1Q20 on our expectations for the external manager not waiving the incentive fee in 2020. However, given the NAV declines we model through the remainder of 2019 and the rolling three-year lookback feature, it is unlikely that any incentive fee will be earned in all of 2020 regardless of whether or not earned incentive fees are waived.
TPG Specialty Lending, Inc. (TSLX: Buy, $23 PT)
May 6, 2019– For 1Q19 TPG earned NII/share of $0.41 versus our estimate of $0.47. Notably, total repayment activity was only $40.4mm compared to $374.7mm Q/Q. As a result, total prepayment-related income (fees and acceleration of unamortized OID) was $0.8mm for 1Q19 compared to $21.2mm in 4Q18. TPG has an average call protection of 103.4 on its loan book and we think that prepayment activity and associated income will likely recover to more average levels through 2019 and 2020. This was the lowest prepayment activity TSLX experienced in over 20 quarters.
XAI Octagon Floating Rate & Alternative Income Term Trust (XFLT: Buy, $13 PT)
February 25, 2019– The 12/31/18 quarter saw the biggest loan market volatility in years with the average bid on loans declining 5.8% on the quarter per the LSTA index. The volatility in BSL benefitted XFLT in two ways as we see it: 1) The existing CLO equity structures benefitted given their liabilities are locked in for twelve years while they can reinvest for five years, allowing increased cash flow and GAAP earnings and 2) The volatility enabled XFLT to make relative value trades across its structured credit as well as first and second lien loan positions and high yield bonds.