THL Credit, Inc. (TCRD)
• Significant current income
• Significant discount to book value
• Ongoing buybacks accretive to book value per share
• Potential for sale to larger BDC/liquidation to close gap to book value
• Expect 10+% IRR over a 5 year time horizon, supported by 12.6% yield at today’s price
Summary:
This is a straight-forward idea to invest in a portfolio of senior-secured, floating rate loans at a
meaningful discount to fair value. The portfolio is managed by a capable asset manager, THL, with
extensive credit markets experience. The manager has spent the last year or so re-positioning the
portfolio towards more 1st lien exposure, more diversification, and a simpler story. The past iteration of
TCRD was CLO equity heavy and concentrated in riskier, credit heavy bets. The portfolio is moving more
towards credit “beta” and away from credit picking. Over time this probably leads to a lower ongoing
ROE profile, but the stock price and price to book ratio have dropped far enough to adjust for this
reality.
A combination of dividend income and price appreciation from a reduction in discount to book either
from improved market perception or corporate action will result in 10+% IRR’s over a reasonable time
horizon. Bad outcomes (i.e. loss of capital) would be limited to a significant credit market event and
even then, the current discount to book value already implies serious credit issues that are not present
in today’s market. In a 2% treasury environment and low single digit expected returns for equities, TCRD
presents an attractive risk-reward at today’s prices.
What follows is a high-level overview. Happy to add more detail in the comments.
Significant Current Income:
The portfolio is earning net investment income of about $0.20-$0.25 per share per quarter roughly in
line with the recent $0.21 quarterly distribution. On a book value per share of $8.96 this is a 9.4% yield –
in line with returns for generic middle market loans. The stock price, however, trades at a 26% discount
to book value at $6.67 per share. Thus, the yield at the current market price is 12.6%. It’s important to
note that management “right-sized” the distribution in 2019 by cutting from $0.27 per share to $0.21.
The $0.27 level was a step down from $0.34 in the 2014-2016 time-frame, supported by mid-high teen’s
returns from CLO equity. Part of the existing discount to book value is the market’s fear of further cuts in
earnings and distributions. We believe further cuts are unlikely given the assets they are investing in, net
of reasonable credit losses, support current earnings and distribution levels.
Significant Discount to Book Value:
The current discount to book value is 26% which is near the all-time low for TCRD. The discount dipped
to 30% in 2016 and late 2018 and represent “outer bounds” for TCRD’s trading history. For historical
context, other BDC’s traded at 50+% discounts to book value in the financial crisis. BDC’s are levered
financial instruments and a major market event will lead to significant price declines. We believe this is
unlikely in the near term and possibly ever again but is a risk (and/or opportunity if you are ready with
capital).