Description

OHA Investment Corporation (OHAI) is a small BDC, and the trading volume of its stock is limited. On 9/30/14 NAV per share was $8.11. Its share price is $4.64. The discount to NAV is 42%.

On 12/12/10 I wrote up NGP Capital Resources (NGPC) at $7.50 a share. I closed it out on 12/22/11 at a slight profit. The stock has declined by 39% while NAV is off by 12%. NGP Capital Resources was a BDC which specialized in lending to the energy business. Energy lending is a very competitive area, and NGPC was unable to invest its capital at a high enough rate to justify its structure. Because of its lack of success, the board of NGPC put the structure up for sale. On 9/30/14 Oak Hill Advisors took over management of the entity. In consideration for the transfer, Oak Hill agreed to reduce the base management fee to 1.75% of total assets (but not including cash, cash equivalents and U.S. treasury bills purchased with borrowed funds for RIC diversification requirements, which was ot previously the case), versus the 1.8% previously charged, and agreed to a 25bp reduction in the fee for the first year. The performance-based incentive fee on net investment income was changed to the manager's advantage with the hurdle rate of 8% being lowered to 7%. Net-net these changes would have benefited the shareholders by about $600,000 last year. In addition, the new advisor agreed to purchase $5,000,000 of common stock. $1,000,000 of the shares would be purchased upon closing at NAV, and the other $4,000,000 purchased in the open market within one year of closing. Oak Hill bought 117,234 shares at $8.53 upon closing the deal. Since that time they have purchased another 696,198 shares bringing their ownership of the company to 813,432 shares as of 12/30/14. I believe that they have fulfilled their stock purchase obligation or are very close to doing so. Oak Hill owns 3.45% of OHAI's shares.

Oak Hill Advisors is a well regarded manager specializing in fixed-income securities including leveraged loans, high-yield bonds, structured products, distressed securities and turnarounds. It was spin-off from Robert Bass's investment company, Oak Hill Capital in 1991. iSTAR (STAR) used to own a minority stake in the business. They sold their stake in 2011 to General Atlantic and Robert Bass. At the time, Oak Hill Advisors was managing $12.8 billion. As of 12/30/14, Oak Hill was managing $25.5 billion and has 200 employees. The firm was founded and is still run by Glenn August. It is successful and well-regarded. The day-to-day management of OHAI will be overseen by Robert Long who was CEO of Conversus Asset Management which oversaw $3 billion of private equity investments. Before that, he worked at BofA in their private equity and lending businesses. 

As of 9/30/14, adjusted for the $18.4 million redemption of an investment in Nekoosa, the OHAI portfolio had $152.8 million of investments and $17.6 million of net cash. With the shares at $4.64, the equity value trades for $$78.3 million net of cash. This is a 49% discount to the 9/30/14 value of its investments. Of course, a lot has happened since 9/30/14, especially to lenders in the energy space. OHAI's portfolio consisted of the following investments on 9/30/14. I am assuming that the two non-energy related positions are money good, and I will make adjustments to the energy holdings as best I can.

The $170.6 million total investments at Fair Value on 9/30/14. The investments are:

$18.4 million - Nekoosa position redeeemed.

$15.6 million - A recent purchase of OCI Holdings 12% subordinated notes marked at par - a home health care service provider.

$9.0 million - 12.75% Sr. Sub notes of KOVA Intl marked at par - a medical supply manufacturer and distributor

$54.3 million Castex Energy 2005 LP 8% redeeemable preferred units- On 12/18/14 Riverstone announced that they were investing another $150 million in the 2005 LP. It looks money good.

$25.6 million ATP/Bennu - ORRI tied up in the bancruptcy of ATP. Bennu, the sucessor to ATP has not signed a clean release but does not want to pursue claims. It looks money good.

$13.6 million Shoreline Energy LLC 9% libor+ 2nd lien due 3/30/19 - quoted at 101 0n Bloomberg. It looks mony good.

$12.4 million Talos Production LLC 9 3/4% Sr. note due 2/15/18 - quoted at 86% on Bloomberg. Bought $200 million of production from Stone Energy 6/14. Talked of going public 10/14.    

                       Owned by Apollo and Riverstone. I think it may be money good.

$5.8 million Huff Energy Holdings 12.5% Sr. sec loan. Carried at 100% on 9/30/14

$3.0 million Spirit Resources - 50% recovery on 1st lien and write-off of the rest.

$2.5 million Contour Highwall Holdings - $10.8 million 12% senior secured term loan. Troubled coal miner. Marked at $7.5 million 9/30. I reduce again to 1/3 of carrying amount.

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$160.2 million or $7.77 a share NAV.

At $4.65 OHAI trades at a 40% discount to NAV.

Catalyst

Oak Hill is interested in bring assets into their new public vehicle. They closed on the structure on 9/30/14. They need to reposition the portfolio as quickly as possible. Investors are still looking at the 9/30 holdings against the back-drop of the decline in energy prices. Hopefully, the 12/31 report will show progress towards a diversified portfolio. At that point there should be a sigh of relief.