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Gladstone restructures loans in Galaxy Tool, Tread; sells Funko

Gladstone Investment Corporation has restructured investments in Galaxy Tool and Tread Corp. in the recent fiscal quarter, exchanging debt holdings for equity, an SEC filing showed.

Gladstone Investment booked a realized loss of $10.5 million when the lender restructured its investment in Galaxy Tool. Debt to Galaxy Tool with a cost basis of $10.5 million was converted into preferred equity with a cost basis and fair value of zero through the restructuring transaction, the SEC filing showed.

Galaxy Tool, based in Winfield, Kan., manufactures tooling, precision components, and molds for the aerospace and plastics industries.

An investment in Tread included debt with a cost basis of $9.26 million. This was also converted into preferred equity. Gladstone Investment realized a loss of $8.6 million through the transaction.

Tread was Gladstone Investment’s sole non-accrual investment as of Sept. 30. As of Dec. 31, 2015, a revolving line of credit to Tread remained on non-accrual. Tread remains Gladstone Investment’s sole non-accrual investment.

Based in Roanoke, Va., Tread manufactures explosives-handling equipment including bulk loading trucks, storage bids, and aftermarket parts.

Also in the quarter, Gladstone Investment sold an investment in bobblehead and toy maker Funko, realizing a gain of $17 million. Gladstone Investment received cash of $14.8 million and full repayment of $9.5 million in debt as part of the sale.

Gladstone Investment Corporation, based in McLean, Va., is an externally managed business development company that trades on the Nasdaq under the ticker GAIN. The BDC aims for significant equity investments, alongside debt, of small and mid-sized U.S. companies as part of acquisitions, changes in control, and recapitalizations. — Abby Latour

Follow Abby on Twitter @abbynyhk for middle-market deals, leveraged M&A, BDCs, distressed debt, private equity, and more.

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Leveraged Loans: Europe-US Yield Differential Widens; Traders Eye Relative-Value Play

secondary loan yields, US v Europe

The yield differential between the U.S. and European leveraged loan markets continues to widen as the U.S. is hit by growing concerns about the credit cycle, as well as exposure to sectors under pressure (energy).

For the week ended Jan. 29, the discounted yield to maturity on the S&P/LSTA Leveraged Loan Index reached 6.88%, versus 5.17% on the S&P European Leveraged Loan Index (ELLI) – a 172 bps difference. At the end of December the differential was 151 bps, and at the end of November it was 117 bps.

Although secondary yields have started to rise slightly at the start of this year in Europe, the loan market on this side of the Pond remains relatively isolated from the broad volatility that hit secondary bonds, and which resulted in a near-silent high-yield bond primary during January. – Isabell Witt

This story first appeared on www.lcdcomps.com, LCD’s subscription site offering complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here

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Starbucks to buy back more shares with bond-sale proceeds

Starbucks (NASDAQ: SBUX) today completed a $500 million offering of 2.10% notes due Feb. 4, 2021 at T+75, or 2.112%, sources said. The issue was printed at the firm end of guidance in the T+80 area, and through early whispers in the T+95 area.

Proceeds will be used for general corporate purposes, including the repurchase of common stock under the company’s ongoing share-repurchase program, business expansion, payment of cash dividends, and/or financing possible acquisitions, according to regulatory filings.

As of Dec. 27, 2015, the company had bought back an equivalent of $5.86 billion of common stock, or nearly 252 million shares, under its share-buyback program dating to August 2006. When the program was initiated, the board authorized the repurchase of 25 million shares, and that has since grown to 300 million shares when the authorization was last increased on July 23 of last year, according to S&P Capital IQ.

The company spent roughly $1.5 billion on share buybacks over the 12 months through Dec. 27, 2015, the most in the company’s history after expenditures of $935 million in 2014 and $202 million in 2013, according to S&P Capital IQ.

Even so, the company’s free cash position remained constructive as Starbucks generated roughly $4 billion of operating cash flow last year, or more than the $3.8 billion of combined spending across share buybacks, capital expenditures ($1.34 billion), and common dividends ($986 million).

Earlier today, Standard & Poor’s and Fitch assigned A–/A ratings to the proposed 2021 issue. “Pro forma for the proposed debt issuance, adjusted debt to EBITDA will increase to 1.1x from 1.0x at Dec. 27, 2015,” S&P stated.

According to Fitch—which upgraded Starbucks’ rating to A, from A– in November—for the year ended Sept. 27, 2015, lease-adjusted leverage was 2.0x, down from 2.2x at the end of fiscal 2013. “Cash flow priorities are to invest in its business and return cash to shareholders. The company has maintained a dividend pay out to earnings in line with its 35–45% target and has been prudent with share repurchases, funding buybacks mainly with internally generated cash,” Fitch said.

In September 2015, Moody’s upgraded Starbucks’ senior unsecured rating to A2, from A3. “”The upgrade reflects Moody’s view that Starbucks measured growth strategy, product pipeline, digital initiatives and balanced financial policy will continue to drive operating earnings, credit metrics, liquidity and scale that is more reflective of an A2 rating,” Moody’s said at the time.

The ratings outlook is now stable on all three sides.

On Thursday, Starbucks announced quarterly earnings that beat analysts’ expectations on profits; however, its stock took a hit on that day, when its forecast for the current quarter lagged expectations.

The Seattle-based specialty coffee company last tapped the market in June 2015, when it completed an $850 million, two-part offering, including 2.7% notes due 2022 at T+78, or 2.703%, and 4.3% notes due 2045 at T+138, or 4.32%.

An infrequent issuer in the market, Starbucks in December 2013 completed a $750 million, two-part offering, including 0.875% three-year notes due 2016 at T+38, and 2% five-year notes due 2018 at T+63, or 2.04%. For reference, the 2018 issue changed hands a week ago at a G-spread equivalent of 36 bps, according to MarketAxess. Terms:

Issuer Starbucks Corp.
Ratings A-/A2/A
Amount $500 million
Issue SEC-registered senior notes
Coupon 2.10%
Price 99.943
Yield 2.112%
Spread T+75
Maturity Feb. 4, 2021
Call Make-whole T+15 until notes are callable at par from one month prior to maturity
Trade Feb. 1, 2016
Settle Feb. 4, 2016
Books GS/JPM/MS
Px Talk guidance T+80 area (+/– 5 bps); IPT T+95 area
Notes Proceeds will be used for general corporate purposes
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Tiny BDC, pursued by activist, announces plan to liquidate

Crossroads Capital, a tiny BDC once targeting pre-IPO equity, announced this week it would liquidate its investment portfolio and distribute cash to shareholders.

This news comes after activist Bulldog Investors became the largest shareholder of the company, previously called BDCA Venture. BDCA Venture changed its name from Keating Capital in July 2014.

Crossroads Capital’s investments are in preferred stock, common stock, subordinated convertible bridge notes, subordinated secured notes, and equity warrants, although under previous management the company made an eleventh-hour attempt to switch to a debt strategy.

However, as of Jan. 25, the company’s investment strategy became “preservation of capital and maximization of shareholder value,” and will immediately pursue a sale of investments.

The plan to liquidate “was made after considerable analysis, review and deliberation. Both management and the board believe this is the most efficient way to deliver the company’s underlying value to our shareholders,” a Jan. 25 statement said.

Among the investments in the portfolio as of Sept. 30 are social media content company Mode Media, ecommerce network Deem, online dating company Zoosk, software company Centrify, renewable oils company Agilyx, human resources software company SilkRoad, waste management company Harvest Power, and solar thermal energy company BrightSource Energy.

Net assets totaled $54.5 million as of Sept. 30, 2015, or $5.63 per share, consisting of 12 portfolio company investments with a fair value of $39 million and cash and cash equivalents of $16.2 million. Shares in Crossroads Capital, which trade on Nasdaq as XRDC, closed at $2.10 yesterday.

In September 2014, the company’s previous board approved a change in strategy to focus on debt of private companies, moving away from venture equity. The change was part of then-management’s attempt to reduce the company’s stock discount to NAV.

But this plan was too little, too late, for some.

In May, Bulldog Investors filed a proxy statement soliciting support for a plan to elect its own board members, terminate an external management agreement with BDCA Adviser, and pursue a plan to maximize shareholder value through liquidation, a sale, or a merger.

Bulldog Investors criticized the strategy to convert BDCA Venture away from venture capital–backed or high-growth companies into an income-oriented fund, saying the BDC’s small size and high expense ratio meant the plan was “almost certainly doomed to fail.”

BDCV’s shares were trading at $5.05 at the time the proxy was filed in May 2015, a 25% discount from its March 31 NAV of $6.71. That compared to a listing price of $10 at the time of the company’s IPO on Nasdaq in December 2011.

In contrast, BDCV’s expenses in the three years prior to the proxy totaled $13.25 million, or $1.33 per share, according to the Bulldog proxy.

The plan laid out in May 2015 has more or less come to pass.

In July, shareholders elected Bulldog-nominated directors Richard Cohen, Andrew Dakos, and Gerald Hellerman. A proposal to terminate the investment advisory agreement with BDCA Venture Adviser failed to pass in a vote at the 2015 annual meeting, but was approved by the board in October.

CEO Timothy Keating resigned in late July, replaced by COO Frederic Schweiger. Around that time, the company held equity investments in 12 portfolio companies, 11 of which were private portfolio companies and the other which was publicly traded Tremor Video. The company did not expect any of the private companies to complete an IPO in 2015.

Schweiger resigned as CEO in December, and was replaced by Ben Harris. Harris is a director of NYSE-listed Special Opportunities Fund.

At the same time, BDCA Venture announced a name change to Crossroads Capital. The ticker changed to XRDC on Nasdaq, from BDCV. — Abby Latour

Follow Abby on Twitter @abbynyhk for middle-market deals, leveraged M&A, BDCs, distressed debt, private equity, and more.

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More activism likely in 2016 as BDCs grow up

The BDC industry is experiencing growing pains.

Shares of most BDCs are trading below net asset value. Several BDCs are under attack by activist investors for stock underperformance, and these very public, acerbic battles are casting a pall over the entire sector. The recent market sell-off also punished BDCs as investors fled the credit-focused asset class.

Looking ahead, 2016 is likely to be a year of more shareholder activism for BDCs, market players say, a trend that could ultimately lift BDC share prices in 2016.

“We believe the BDC group could see stock prices increase 5% in 2016. When combined with an average dividend yield of 10%, we expect BDC total returns of 15%. In addition, the growth in shareholder activism could be a further catalyst for the group, particularly for some of the more discounted stocks,” said Troy Ward, an equity analyst at Keefe, Bruyette & Woods, in a Dec. 7 research note.

What won’t likely be a theme next year is raising capital through equity offerings.

“In a period where few BDCs have access to equity capital at accretive levels, earnings growth will be a function of recycling capital and taking optimum advantage of debt capital,” said Merrill Ross, an equity analyst at Wunderlich Securities. “We are looking for earnings growth of approximately 6.7% in 2016.”

Sector dramas unfold
Rifts within the BDC sector will likely widen next year, with battle lines drawn over management fees, the willingness of boards to buy back stock, and whether investors perceive management to be aligned with shareholder interests.

“Activism is going to be a big issue,” said Golub Capital CEO David Golub. Shares in Golub Capital BDC were trading at $16.70 at midday on Dec. 18, a premium to NAV of $15.80 per share as of Sept. 30.

“We are in the midst of what I would characterize as a crisis of confidence in the BDC industry. Investors are skeptical because of self-serving behavior by many BDC managers, often at the expense of their shareholders,” Golub said. The comment was in response to a question on the prospects for the BDC modernization bill, the passing of which Golub believes could be marred by poor timing.

“I hope the industry comes out of this period of activism by becoming a better neighborhood—an industry that’s more focused on shareholder value, that’s more focused on doing things that are fair and good for everybody and not just good for managers. That would be good for the industry.”

For now, all eyes are on dramas involving activist investors, including Fifth Street Finance and Fifth Street Asset Management, which are targets of a class action lawsuit. The suit alleges that the firms fraudulently inflated the assets and investment income of Fifth Street Finance to increase revenue at Fifth Street Asset Management. The firms deny the allegations and are fighting them in court.

Fifth Street Finance has agreed to meet with RiverNorth Capital Management, which is currently the largest stockholder in Fifth Street Finance, with a 6% stake.

American Capital has also been the target of an activist investor since the company unveiled plans to spin off BDC assets. Last month, Elliott Management, which owns an 8.4% stake in the company, urged shareholders to vote against the plan, saying a split would further entrench an ineffective management team that has been overpaid for poor performance and placed valuable assets at risk.

American Capital followed with the launch of a strategic review aimed at maximizing shareholder value, run by an independent board committee and advised by Goldman Sachs and Credit Suisse. Results of the review, which could include a sale of all or part of the company, will be announced by Jan. 31.

American Capital also started a share-buyback program of up to $1 billion of common stock as long as shares are trading 85% below net asset value as of Sept. 30, which was $20.44 per share. Shares were trading at $14.00 at midday on Dec. 18.

In another saga, the board of KCAP Financial, an internally managed BDC, received a letter in October from funds managed by DG Capital Management, its third largest stockholder with a 3.1% stake. DG Capital told the board that selling the business to another BDC would likely reap the best yield to shareholders, who have endured a sustained period of underperformance.

A three-way battle over TICC Capital has intensified in recent months. TICC Capital is urging shareholders to allow Benefit Street Partners, the credit investment arm of Providence Equity Partners, to acquire TICC Management, which manages the investment activities of TICC Capital. NexPoint Advisors, an affiliate of Highland Capital Management, has also submitted a proposal to cut fees and invest in TICC Capital.

The third party, TPG Specialty Lending, has unveiled a stock-for-stock bid for TICC Capital Corp., saying the offer is superior to the competing proposals from either Benefit Street Partners or NexPoint.

The move thrust Josh Easterly, TPG Specialty Lending’s co-CEO, into a prominent role in the drama that could result in such drastic measures as the management company losing its ability to manage a BDC, an outcome that few expected at this time last year.

“Those familiar with our history and investment philosophy understand that it is not in our nature to be public market equity activists,” Easterly said during an earnings call on Nov. 4.

“We have reluctantly assumed this role with respect to TICC as our industry is going through an inflection point,” he said. “We believe that our ecosystem can only thrive in a culture that fosters real value creation for shareholders.”

Awkward years
One possible outcome for the industry longer term is lower management fees. Medley Capital, which has been named as a potential target of activist shareholders, this month unveiled plans to expand a share repurchase program to $50 million after buying back 1.4 million of shares in the most recent quarter, and cut its base management fee on gross assets exceeding $1 billion to 1.5%, from 1.75%, and incentive fees to 17.5%, from 20%.

Medley Capital was part of a trend last year that saw shares of its management company listed in an IPO, following in the footsteps of Ares Management and Fifth Street Asset Management. Medley Management, whose shares trade on NYSE as MDLY, derives most of its revenue from fees for managing BDCs Medley Capital and Sierra Income Corp.

Brian Chase, the CFO of Garrison Capital, said an important factor moving forward is whether a BDC manager also manages other funds, outside of their BDC, that invest in privately originated debt investments. Having access to this institutional capital will be key to staying relevant in the market, particularly in an environment where raising fresh equity is challenging.

Some upsets are possible in the near term due to activist investors’ attention on the BDC sector.

“The BDC space is going through its awkward teenage years. I expect that in due course the sector as a whole will mature and institutionalize, which should further open up access to more capital and solidify their role in the financial system,” said Chase.  — Abby Latour

Follow Abby on Twitter @abbynyhk for middle-market deals, leveraged M&A, BDCs, distressed debt, private equity, and more.

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Third Ave’s liquidating debt fund holds concentrated, inactive paper

The leveraged finance marketplace is abuzz this morning ahead of a conference call to address to a plan of liquidation for the Third Avenue Focused Credit mutual fund following big losses this year, mild losses last year, heavy redemptions, and now a freeze on withdrawals. The news was publicly announced last night by the fund, and there will be a call at 11 a.m. EST for shareholders with lead portfolio manager Thomas Lapointe, according to the company.

Market sources yesterday relayed rumors of a near-$2 billion redemption from the asset class, and as one sources put forth, “the odd thing was it was difficult to trace the money that left, what was sold, and where it went.”

That was followed up by last night’s whopping, $3.5 billion retail cash withdrawal from mutual funds (72%) and ETFs (18%) in the week ended Dec. 9, according to Lipper, although it’s not entirely clear if that figure—the largest one-week redemption in 70 weeks—can be linked to Third Avenue. (LCD subscribes to weekly fund flow data from Lipper, but cannot see inside the aggregate observation.)

Nonetheless, it’s worthy of a dive into the open-ended fund, which trades under the symbol TFVCX. The fund shows a decline of 24.5% this year, versus the index at negative 2.94%, after a 6.3% loss last year, versus the index at positive 2.65%, according to Bloomberg data and the S&P U.S. Issued High Yield Corporate Bond Index.

It’s an alternative fixed-income fund that’s “extremely concentrated,” and “hardly representative of a ‘high yield’ or ‘junk bond’ fund,” outlined Brean Capital’s macro strategist Peter Tchir in a note to clients this morning. He highlighted that Bloomberg analytics show a portfolio that’s almost 50% unrated, nearly 45% tiered at CCC or lower, and just 6% of holdings rated BB or B.

The holdings are all fairly to extremely off-the-run, hence the trouble selling assets to meet redemption, and thus, the liquidation. The remaining assets have been placed into a liquidating trust, and interests in that trust will be distributed to shareholders on or about Dec. 16, 2015, according to the company.

Top holdings follow, and none have traded actively or very much in size of late, trade data show:

  • Energy Future Intermediate Holdings 11.25% senior PIK toggle notes due 2018; recent trades in the Ch. 11 paper were at 107.5.
  • Sun Products 7.75% senior notes due 2021; recent trades were at 87.5, versus 90 a month ago and the low 70s a year ago.
  • iHeartCommunications 14% partial-PIK exchange notes due 2021; block trades today were at 30 and 32, from 27 last month.
  • New Enterprise Stone & Lime 11% senior notes due 2018; odd lots traded recently in the low 80s, versus mid-80s last month.
  • Liberty Tire Recycling 11% second-lien PIK notes due 2021 privately issued in an out-of-court restructuring; trades reported in the mid-60s.

Amid those any many others of a similar ilk, the fund also reports a holding in Vertellus B term debt due 2019 (L+950, 1% LIBOR floor). The chemicals credits put the $455 million facility in place in October 2014 as part of a refinancing effort, pricing was at 96.5, and it’s now at 78/82, sources said.

“Investor requests for redemption … in addition to the general reduction of liquidity in the fixed income markets, have made it impracticable for FCF going forward to create sufficient cash to pay anticipated redemptions without resorting to sales at prices that would unfairly disadvantage the remaining shareholders,” according to the company statement.

“In line with its investment approach, FCF has some investments in companies that have undergone restructurings in the last eighteen months, and while we believe that these investments are likely to generate positive returns for shareholders over time, if FCF were forced to sell those investments immediately, it would only realize a portion of those investments’ fair value given current market conditions,” the statement outlined.

Further details are available online at the Third Avenue Management website. — Matt Fuller

Follow Matthew on Twitter @mfuller2009 for leveraged debt deal-flow, fund-flow, trading news, and more.

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Huge high yield bond fund outflows: Why it’s not as bad as it seems

 

An LCD News story earlier today passed on incorrect information from data administrator Lipper regarding the Third Avenue Focused Credit fund that halted redemptions and is being liquidated. There was, in fact, a $111 million redemption from that fund this past week. A corrected story follows:

U.S. high-yield funds saw a net $3.5 billion retail cash withdrawal in the week ended Dec. 9, marking the largest one-week redemption since the record $7.1 billion outflow 70 weeks ago, or since the week ended Aug. 6, 2014, but it’s not as bad as it seems. Lipper today clarified with LCD that mutual funds this past week reported large seasonal distributions, but reinvestment has not yet been recognized, so it’s essentially a mid-read and look for a “catch up” in the weeks ahead.

This is a time of year when distributions “wreak havoc” with the flows data, according to Lipper. It’s possible that we’ll see the reinvestment characterized as inflows next week, but there also may be more distributions, Lipper added.

As per the flurry of news surrounding the liquidation of the alternative fixed income mutual fund Third Avenue Focused Credit, Lipper relayed that the fund-management group overall reported multiple outflows this past week, with $111 million specifically pulled from that open-ended fund. (LCD subscribes to weekly fund flow data from Lipper, but cannot see inside the aggregate observation.)

As for the one-week figure, see “US HY funds report largest cash outflow since record 70 weeks ago,” LCD News, Dec. 10, 2015. — Matt Fuller

Follow Matthew on Twitter @mfuller2009 for leveraged debt deal-flow, fund-flow, trading news, and more.

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S&P/LSTA Leveraged Loan Index in the red, YTD return negative 0.10%

Loans lost 0.13% today after losing 0.09% yesterday, according to the LCD Daily Loan Index.

The S&P/LSTA US Leveraged Loan 100, which tracks the 100 largest loans in the broader Index, lost 0.28% today.

In the year to date, loans overall have lost 0.10%.

Daily Loan Index Dec 10 2015

The following Loan Volatility Metric (LVM) chart illustrates secondary loan market volatility.

LVM Dec 10 2015

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US Leveraged Loan Bids Hit 2015 Low in Trading Market

The average bid of LCD’s flow-name composite dipped 16 bps over the past few trading sessions, to a nearly one-year low of 96.11% of par. Today’s reading is the lowest since Dec. 16, 2014, when the average bid stood at 95.28.

Among the 15 names in the sample, however, it was a mixed bag: four loans advanced, five declined, and six were unchanged from the previous reading. Posting the largest move in either direction was the typically volatile Avaya B-7 term loan due 2020 (L+525, 1% LIBOR floor), which was bid 1.75 points lower, at 74.25.

While commodity credits have come under pressure over the past few sessions, par credits have been largely stable. Though the broader high-yield market has come under pressure—the average bid of LCD’s flow-name bond composite dropped 181 bps in today’s reading, to 86.95% of par—higher-quality loans have held up, bolstered by a recent flurry of CLO issuance ahead of year-end despite challenging market conditions, as well as some recent large repayments, including those for SunGard Data Services and Freescale Semiconductor.

With the average loan bid falling 16 bps, the average spread to maturity rose seven basis points, to L+483.

By ratings, here’s how bids and the discounted spreads stand:

  • 98.24/L+403 to a four-year call for the 10 flow names rated B+ or higher by S&P or Moody’s; STM in this category is L+392.
  • 91.85/L+702 for the five loans rated B or lower by one of the agencies; STM in this category is L+665.
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Loan technicals slide in November as supply dwarfs capital formation

In November, loan market technicals went from bad to worse as supply exceeded visible capital formation to the tune of $17.5 billion: $19.89 billion to $2.38 billion. It was the market’s biggest technical deficit since November 2007 when the prior cycle’s LBO boom crested.

As the chart illustrates, the market has experienced three successive months of technical red ink during which net new supply outran visible inflows by $32.34 billion, the largest three-month shortfall since the final quarter of 2006. — Staff reports

Loan market technicals Nov 2015