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, $6 PT)
November 1, 2018– For fiscal 2Q19, Apollo earned $0.15/share of NII, matching our estimate as well as the quarterly dividend. NAV/share was flat on the quarter with realized losses of $8.1 million partially offset by $3.9 million of realized gains.
Ares Capital Corp. (ARCC: Buy, $19 PT)
November 1, 2018– ARCC posted a very strong $0.45/share of core NII in 3Q18, four cents above our $0.41 estimate. The beat was largely due to capital structuring service fees from non-affiliate investments which we modeled to be $23.8 million for the quarter but came in at $39.0 million.
Barings BDC Inc. (BBDC: Neutral, $13 PT)
November 13, 2018– Barings wrapped up its first partial quarter as external manager to the formally internally managed TCAP vehicle. As a reminder, Barings officially took the helm on 8/3/18. NII/share came in at ($0.59) although this was largely from the compensation packages paid to the Triangle executives leaving. From 8/3/18-9/30/18, Barings earned NII/share of $0.06/share. The company declared a$0.10/share dividend for 4Q18.
Capital Southwest Corp. (CSWC: Buy, $24 PT)
November 12, 2018– CSWC earned core NII/share of $0.36 for fiscal 2Q19, two cents above our estimate. The dividend declared came in at $0.44, a $0.34/share base dividend plus the $0.10/share quarterly supplemental dividend. We had previously modeled a $0.41/share total dividend.
Eagle Point Credit Company (ECC: Buy, $24 PT)
August 16, 2018– For 2Q18 ECC earned NII+realized gains (earnings) per share of $0.34 versus our estimate of$0.35. The earnings were lower due to the $0.20/share impact of the issuance of the ECCX notes (with debt issuance costs being recognized up-front as opposed to amortized over the expected life) as well as the costs associated with the redemption of ECCZ notes.
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.
Garrison Capital Inc. (GARS: Buy, $11 PT)
August 13, 2018– Garrison earned adjusted NII/share of $0.27, a penny shy of the quarterly dividend and 3 cents below our estimate. The company is expected to resume earning its incentive fee in 4Q18 which would likely induce a dividend cut.
Gladstone Capital Corp. (GLAD: Sell, $7 PT)
November 16, 2018– Gladstone’s NAV/share declined by 6.1% Q/Q to $8.32 from $8.86 as a result of Francis Drilling being placed on non-accrual status effective 7/1/18. The company marked down both of its second lien debt tranches materially, from 76.2% of cost and 75.9% of cost to 28.7% of cost for each tranche, respectively.
Goldman Sachs, BDC, Inc. (GSBD: Buy, $23 PT)
November 5, 2018– For 3Q18, GSBD posted $0.54/share of NII, three cents above our estimate and comfortably above the $0.45/share quarterly dividend. Sales and repayments totaled $111.1 million on the quarter, up from $78.8 million Q/Q and we expect that this increased prepayment activity drove acceleration of unamortized OID and the earnings beat.
Golub Capital BDC. Inc. (GBDC: Buy, $22 PT)
November 30, 2018– GBDC posted core NII/share of $0.32 for F4Q18, matching our estimate and the quarterly dividend. With taxable income being in excess of NII, GBDC also declared a $0.12/share special dividend for the 12/31/18 quarter on top of the $0.32/share regular dividend. The big news of the earnings release was that GBDC will seek to merge with its nontraded BDC Golub Capital Investment Corporation (GCIC). The proposed merger terms would give GCIC shareholders 0.865 shares of GBDC for each share of GCIC. The transaction is expected to close in calendar 1H19 and would make GBDC the fourth largest public BDC.
Horizon Technology Finance Corp. (HRZN: Neutral, $11 PT)
November 2, 2018– Horizon posted NII/share of $0.30 for 3Q18, matching both our estimate as well as the quarterly dividend. The company had $24.2 million of originations versus sales and repayments of $11.9 million.
Main Street Capital Corp. (MAIN: Neutral, $38 PT)
November 5, 2018– Main Street posted NII/share of $0.63 for 3Q18, matching our estimate and comfortably ahead of the$0.57/share regular quarterly dividend. The company guided towards DNII/share (NII + share-based compensation) of $0.63-$0.65 for 4Q18, which we think is a roughly $0.04/share difference from NII (NII/share likely $0.59-$0.61).
Monroe Capital Corp. (MRCC: Neutral, $13 PT)
November 9, 2018– Monroe earned adjusted NII/share of $0.38 for 3Q18, two cents above our estimate and three cents above the quarterly dividend. However, the earnings beat came from the incentive fee not being earned at all during the quarter, which we model to have positively impacted earnings by $0.07/share.
Oaktree Specialty Lending Corp. (OCSL: Neutral, $5 PT)
August 13, 2018– Oaktree earned $0.10 for the 6/30/18 quarter versus our estimate of $0.11 and the quarterly dividend of $0.095/share which was held flat with the quarter prior. The company continues to rotate out of legacy Fifth street assets at a brisk pace with $536.0 million in non-core assets exited at par or above marks. Of this total $179.0 million was sold alone in fiscal 3Q18 with $42.0 million of the total being non-interest bearing, with $135.0 million of non-interest-bearing assets remaining.
OFS Capital Corp. (OFS: Buy, $15 PT)
November 5, 2018– OFS earned $0.35 of NII/share for 3Q18, matching our estimate and exceeding the quarterly dividend by a penny. We think that earnings will be up a couple cents in 4Q18 as a result of OID acceleration before further portfolio growth and balance sheet leverage increasing through 2019 drive further earnings growth.
Oxford Square Capital Corp. (OXSQ: Sell, $5 PT)
November 5, 2018– For 3Q18, OXSQ posted estimated core NII/share of $0.20 versus our estimate of $0.19. Core numbers were not provided during the quarter in both the 8-K as well as the presentation and we are not sure why. However, we added back the $1.2 million in CLO equity reductions to cost in order to approximate estimated additional taxable income (EATI) and arrive at our core figures. This is unusual as OXSQ has reported this number consistently and dividend payout requirements for ’40 Act companies is based upon taxable income, not GAAP earnings or NII.
Prospect Capital Corp. (PSEC: Sell, $4 PT)
August 31, 2018– PSEC earned NII/share of $0.22 for fiscal 4Q18 versus our estimate of $0.19 and the dividend of$0.18. Interest income from control investments jumped to $56.1 million from $45.9 million sequentially Q/Q and CLO equity income increased to $34.7 million from $31.3 million Q/Q. While we can understand that resets and refinances in prior quarters drove increased GAAP effective yield on CLO equity and thus more income, we think a quarterly increase of 22% in interest income from controlled investments is worthy of significant skepticism.
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)
November 6, 2018– Solar posted $0.44/share of NII for 3Q18, above the $0.41/share quarterly dividend but short of our $0.46/share estimate. The portfolio at fair value was up modestly on the quarter to $1.41 billion from $1.40 billion Q/Q. The company has been and we expect will likely continue to be one of the most disciplined underwriters in the BDC sector.
StoneCastle Financial Corp. (BANX: Buy, $25)
November 5, 2018– BANX posted NII/share of $0.40 for 3Q18, 2 cents per share shy of our estimate but comfortably above the $0.40/share quarterly dividend. The earnings were below our expectations due to the portfolio being flat on the quarter.
TCP Capital Corp. (TCPC: Buy, $19 PT)
August 13, 2018– For 2Q18, TCPC earned NII/share of $0.41, a penny above our estimate and well above the$0.36/share quarterly dividend. TCP has not earned less than $0.37/share since 2Q13. We regard the dividend policy as too conservative, but nonetheless respect TCP avoiding a situation where the dividend might have to potentially be cut. As a result, we don’t expect a base dividend increase unless credit spreads widen materially and for a sustained period of time.
THL Credit, Inc. (TCRD: Neutral, $9 PT)
November 14, 2018– TCRD’s NAV/share decreased to $10.10 from $10.23 Q/Q largely pertaining to write-downs from Charming Charlie’s and LAI. Although these are not currently on non-accrual, previous non-accrual Loadmaster Derrick’s revolver was also placed on non-accrual during the quarter, bringing the cost basis of this investment’s non-accruals up to $13.0 million from $8.4 million Q/Q.
TPG Specialty Lending, Inc. (TSLX: Buy, $23 PT)
November 12, 2018– TPG posted NII/share of $0.50 for 3Q18, matching our estimate but significantly above the regular dividend of $0.38/share. The company alluded to potentially raising the regular dividend and we think the increased balance sheet leverage and ROE would likely support an increase. However, we think TSLX has proven to be very conservative with distributions and thus for the time being we think the base dividend will be flat with more variable supplemental dividends paid so that the company meets its required payout ratios in accordance with the ’40 Act.
XAI Octagon Floating Rate & Alternative Income Term Trust (XFLT: Buy, $13 PT)
October 29, 2018– We are initiating coverage on XAI Octagon Floating Rate & Alternative Income Term Trust (XFLT) with a BUY rating and $13 price target. The company is sub-advised by Octagon Credit, a leading CLO and credit investor in the US. Despite the small size of XFLT, it is worth noting that Octagon Credit has just over $20 billion of AUM and is thus able to leverage its extensive knowledge of credit markets for the benefit of XFLT shareholders. Octagon has been a top five CLO issuer since the financial crisis.