Description

Executive summary: TICC is a closed end BDC trading at a significant discount to NAV. With two companies competing to take over their management contract and another BDC trying to buy the whole company, an investment at today’s prices (~$6.90 per share) has limited downside and significant upside in a short time frame. In addition, by buying shares at today’s prices, an investor can serve as his own catalyst by indicating to management that they would support a sale close to NAV and will vote to replace the board at the earliest opportunity if they go through with a different option.

TICC is an interesting case study in competing incentives. The question is: when management’s incentives differ from shareholders, whose win out?

The company is a closed end, externally managed business development company (BDC) historically focused on investing in debt, particularly syndicated loans and CLO investments. They have historically been a pretty terrible underperformer, mainly because of a very rich management fee: 2% of assets (not equity, assets) plus 20% of all returns above a hurdle rate. So, for example, if you had invested on September 18, 2012, and held for the past three years, you would’ve slightly lost money (after dividends) while management made more than $50m (not insignificant on $515m in equity as of June 2015) and the S&P 500 went up ~35%.

In August, TICC announced an interesting merger. Benefit Street Partners (BSP) would acquire TICC’s management company and begin to collect TICC’s management fees. Common shareholders got nothing in the deal except a new manager with a new mandate to invest in private debt. Terms weren’t disclosed, but given the permanent nature of the capital and the attractive fee set up, I would guess management made out like bandits (some estimated the payment was around $60m).

However, shareholders did have to approve a change in the company’s bylaws to the new manager, and that approval process opened the door to shake the company up. It started with NexPoint, who sent a very cleverly worded letter saying the merger was an “acknowledgment that replacement management” was in the best interest of the company and offered to take over management at a lower fee than TICC was currently getting. The NexPoint offer forced BSP and TICC to restructure their management contract by lowering their management fee from 2.0% to 1.5% as well as agreeing to purchase common stock on the open market to better align their interest with shareholders.

However, that 1.5% was still a pretty high fee. On September 15, NexPoint came back with a deal to manage the company for a 1.25% management fee, plus a waiver for the first $20m of fees. The next day, TPG Specialty Lending (TSLX) took public an offer to buy the whole company in a stock for stock deal.

So to sum up, there are currently three parties involved in TICC. BSP is management’s preferred choice; they are offering to buy the external management company, leave TICC as a standalone, and charge 1.5 and 20. NexPoint is not offering to buy the management company, but would take over the external management, charge 1.25 and 20 (they would also grant some additional fee waivers), and leave TICC as a standalone company. TSLX would just buy the whole company in a stock for stock deal. Both NexPoint and TSLX have indicated they will file proxy statements to prevent the BSP deal.

Clearly, as currently set up, either the TSLX or NexPoint deal would be better for shareholders than BSP’s. Unfortunately, there is no guarantee shareholders can force TICC to choose one of those two. Both TSLX and NexPoint are running competing proxies, so it’s possible that the two of them arguing with both the company and each other confuses shareholders and allows management to sneak the BSP merger through. It gets even trickier after considering the record date for voting. TSLX announced their bid September 16, but unfortunately the record date for voting on the BSP deal was August 31th. If the record date was the end of this month, it would probably be a done deal that investors would buy in below TSLX’s offer price, vote for TSLX, and force the deal through. With the record date having already passed, it’s certainly possible TICC’s management manages to get their preferred BSP deal through even with better deals on the table.

However, it’s difficult for me to believe that’s an option at this point. NAV is currently $8.30 per share (adjusted for a recent dividend but not including any income during the quarter) and shares were trading in the low $6s before the TSLX offer was on the table. BSP was buying TICC’s management company expecting a perpetual management fee and permanent capital. If management forces the BSP deal through, activists could simply come in, vote the board out next year, and then offer to sell to TSLX or liquidate the company and make a nice return on their investment given the discount to NAV shares are trading for today. With the threat of that activism / vote out looming, the external management contract becomes much less valuable and it should force management back to the table with TSLX and NexPoint.

I think the endgame here is likely a sale to TSLX at a nice premium to today’s price. TSLX has already offered $7.50 per share in stock. I would envision they could raise their price a bit (say, to $7.60) plus offer to buy the management company for ~$25m. Provided they did the whole deal with stock, they would be issuing their above NAV stock to buy TICC for a discount to NAV (including paying for the management company, they would be buying TICC for ~$8.00 versus NAV of $8.30 + any income during the quarter). That deal would work out for all parties: management gets something for the external management company, shareholders get a nice premium to today’s price, TSLX management gets another $1b in assets to charge fees on, and TSLX shareholders realize an increase in NAV from buying TICC shares below NAV.

Catalyst

Sale to TSLX or another BDC

Activists forcing board out to engage a sale process