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A Post-Earnings Update on One of Our Big-Yielders

One of our colleagues had a great line during his CNBC interview this week. He said...

“As an investor, the pain of buying at 100 and watching something go to 10, is only trumped by the pain of actually selling something at 10 and watching it go to 100... At this point, I think the horrendous losses are behind the company.”

The post-earnings selloff this article discusses wasn’t anywhere near that extreme, but we do believe the worst is behind the company. We're not selling, and the shares are worth considering for new investors.

The company we are talking about is one of the holding within our Blue Harbinger Income Equity portfolio, and your takeaway is as follows…

Triangle Capital's (TCAP) 13% Yield May Be Trimmed, But Price Already Chopped 20%

Triangle Capital's Dividend Yield is Too High

Based on TCAP’s evolving strategy (the company is investing higher in the capital structure now as market conditions are evolving, see note 1), the dividend yield is too high (yields are lower higher in the cap structure). TCAP can lower its yield by either driving its price higher with new investments (see note 5) or by cutting its dividend. However, given the company’s already declining book value (see note 2), and the company’s recent history of cutting the dividend (they cut in 2016 so the dividend did not exceed net investment income, see note 6) we believe a dividend cut is likely, and the recent 20% price decline (see note 3) reflects that (it also reflects the recent announcement to downgrade one investment to non-accrual status and two investments to PIK non-accrual status, see note 4).

The Good News for Triangle

However, the good news for TCAP, in our view, is it has built a strong brand name and franchise, it is NOT at risk of going out of business anytime soon (it has one of the lowest long-term debt to total capital ratios (see note 3), and its internal management team is more cost efficient and more long-term focused than most external management teams at other BDCs (TCAP is internally managed)). We believe that TCAP has the financial wherewithal, management team, and strategic focus to grow in value (and maintain a big (but slightly less big) dividend) over the long-term, and because we believe the recent significant price decline already reflects the likelihood of another small dividend cut in the future (to “right-size" the dividend versus net investment income) the dividend will still be very large), we remain long-term investors.

We Are Long TCAP

We have no intention of selling our TCAP shares (see all of our holdings here). To paraphrase the quote earlier in this article... As investors, we know the pain of watching your investment decline 20% in value. However we also know that pain is trumped by the pain of selling something after a 20% decline only to then watch it rebound more than 20% in the future. We don’t believe TCAP will rebound 20% overnight, but we do believe it can rebound that much in the coming years (as interest rates rise, and the company optimizes its risk-reward based on evolving market conditions), while still delivering large dividend income to its investors. We are long TCAP.

Your Takeaway

If you're already long TCAP (like we are), you may choose to hold on to your shares (like we are). However, if you are not already long TCAP, then you might consider adding shares after this pullback. Alternatively, if you believe a dividend cut is imminent, then you might also consider waiting for a dividend cut announcement and then purchases shares shortly thereafter. And as a reminder, we hold TCAP as just one position within our well-diversified investment portfolio. 

Note 1:

Per TCAP’s Q2 conference call last week…

“We are continuing our migration away from legacy mezzanine investments and into more senior oriented investments which contain greater lender rights and protections, which we believe are prudent to pursue at this point in the economic cycle. To be more precise of the eight investments we have closed since April 1 of this year, six of them are through second lien or unitranche investments.”
“From a strategic standpoint, I'm also pleased to report that in light of our migration from a predominately mezzanine oriented investment strategy, close to 50% of our current investment portfolio is now comprised of first lien, second lien and unitranche investments. In addition, over 40% of our investment portfolio is comprised of floating rate investment structures poised to provide higher yields [sure that's apprise] continue to rise. And by the end fiscal 2017, I expect that approximately two thirds of our investment portfolio will be comprised of these more up balance sheet structures.”

Note 2:

Per TCAP’s Q2 earnings press release…

“Our net asset value or NAV per share as of June 30 was $14.83 as compared to $15.29 at March 31 and $15.13 per share as of December 31, 2016. The primary driver of the NAV declined this quarter was unrealized depreciation on our portfolio investments partially offset by our net realized gains.”

And per the company’s earnings call transcript…

“During the second quarter, we recognized net realized gains across our investment portfolio totaling $5.2 million which consisted primarily of gains totaling $8.3 million on the sales of three investments offset principally by a loss on the write-off of our investment in power direct marketing in the amount of $2.7 million.”

And for perspective, also per the earnings call…

“Since our inception in 2007, our net realized gains across our investment portfolio totaled approximately $11.8 million.”

Note 3:

Note 4:

Per the Q2 earnings call…

“Our non-accrual investments totaled 5.4% of the cost basis of our investment portfolio or $67.5 million and included one new non-accrual account or $17.7 million investment in Community Intervention Services, Inc. which was moved from pick non-accrual status to four non-accrual status during the quarter.”
“In addition, we had two new big non-accrual assets during the second quarter. We placed both our $14 million subordinated debt investment in Capital Enterprises Inc., and our $12.6 million subordinated debt investment in Eckler Holdings Inc., and big non-accrual status.”

Note 5:

Per the Q2 earnings call…

“Last quarter in my prepared remarks, I indicated that 2017 had gotten off to a rapid start for TCAP, as we had originated over $145 million in new portfolio company investments. I'm pleased to report that since the beginning of the second quarter, we have maintained a healthy pace of activity as we have originated approximately $90 million of new portfolio company investments.”

Note 6:

Per the Q2 earnings call…

“During the second quarter we generated net investment income per share of $0.41 our NII was $0.04 lower than our divided on per share basis, primarily moving to the short-term operational dilution from our February 28, 2017 equity offering.”

For reference, all our of current Blue Harbinger holdings are available here.

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