Description

Alcentra Capital Corp (Nasdaq:  ABDC)
Price: $7.98
Shares: 12.9m
Market Cap: $103m
Cash: 11m
Debt: $83m
Enterprise Value: $174m
**********************
Assets: $254m
Net Assets: $146m
NAV per share:  $11.13

Alcentra Capital Corporation (“ABDC”) operates as a Business Development Company (“BDC”).  It has been a disappointing investment since coming public in 2014 for several reasons:  it never achieved any scale, its loan book has suffered losses, its management team has been subpar, and its dividend distributions have been lowered on two occasions.

We think that recent pressure by well-known activist Joseph Stilwell (Stilwell Value Partners) in tandem with the Company's hiring of Houlihan Lokey to explore strategic alternatives could result in a sale of the Company (and/or its asset management contract) by year end.

Summary

• Publicly traded on the NASDAQ: ABDC
• Regulated by the SEC under the Investment Company Act of 1940
• Advised by Alcentra NY, LLC, a majority owned indirect subsidiary of The Bank of New
York Mellon Corporation.
• Originates and invests in middle market companies.
• Typical EBITDA of $15 - $75 million
• The current portfolio is composed of 30 investments including 28 companies, 1 broadly
syndicated loan (“BSL”), and 1 rated CLO debt instrument.

Short History

-    $15.00 per share IPO in 2014 – sponsored by a subsidiary of a subsidiary of BNY Mellon.
-    Paid a $0.34c quarterly dividend at the time of its IPO that lasted for almost 3 years.
-    Hit credit issue in their portfolio in May 2017 – reduced their dividend to $0.25c per quarter and then to $0.18c per quarter in March 2018, which is where it stands today.
-    Issued 808k shares in May 2017 at around $13 per share.
-    Wrote down its assets by a net of $10mn in Q2 2017 (NAV went from $13.43 to $12.73).
-    Company is on its third CEO.  On March 12, 2019, ABDC's Board of Directors appointed Suhail A. Shaikh, a Co-President of the Company, to serve as Chief Executive Officer of the Company. Vijay Rajguru will continue to serve the Company as Chairman of ABDC's Board of Directors.

More on the CEO

Suhail joined Alcentra Group in May 2018 from Solar Capital Partners LLC, where he was a senior investment professional. Solar is a private credit fund advisor which manages over $4 billion of investable capital in two publicly listed business development companies and other funds. Since joining Solar in 2011, Suhail was responsible for the origination, structuring, and investment of financial sponsor-backed middle market principal credits, spanning first lien, unitranche, and second lien transactions.

Prior to being a private credit investor, Suhail was in investment banking for over fifteen years as a leveraged finance specialist and financial sponsor banker, most recently as a Managing Director in the Financial Sponsors Group at Bank of America Merrill Lynch. He previously worked in CIBC World Market’s Financial Sponsor Group in New York and in the Leveraged Finance and Telecom Groups at JPMorgan & Co. in New York and London. He began his career as an investment analyst in the Investment Management Group at Bankers Trust.

Suhail earned an M.B.A. from The Wharton School of Business with a concentration in Finance and graduated Cum Laude with an A.B. in Computer Science and Economics from Middlebury College.

Stilwell Value Partners

Stilwell Value Partners is based in NYC and is typically an activist in banks, insurance companies and other financials.  Over the course of more than 20 years, they have pressed hard for change at small public companies.  While not every investment has been a winner, they have done quite well at forcing small financial institutions trading at a meaningful discount to book value to buy back shares or sell the company.  A cursory look through years of their 13-D filings reveals:

-    68 Activist Investments
-    30 Companies Sold or Merged
-    450 13-D Filings
-    33 Proxy Contests
-    20 Board seats obtained

Stilwell's first 13-D on Alcenta was filed in December of 2017.  They reported holding 1m shares (7.7%).

By March of 2017, Stilwell had made a second filing increasing its holding to 1.2m shares (9.3%).

By November of 2018, Stilwell amended his filing to state:

"We hope to work with the Issuer to reduce its share price discount to net asset value. We informed management at a meeting on January 5, 2018, and reiterated several times throughout the year, that if the Issuer does not repurchase 10% of its shares in 2018, we will aggressively seek board representation."

On Jan 28, 2019, Stilwell updated the 13-D once more to state:

"We informed management at a meeting on January 5, 2018, and reiterated several times throughout the year, that if the Issuer did not repurchase 10% of its shares in 2018, we would seek board representation. They did not do so. We intend to gain board representation and work to maximize shareholder value at the Issuer."

Stilwell continued to increase his exposure to ABDC via swaps, and filed a Proxy proposing 3 nominees.

On April 16, 2019, Stilwell filed a 13-D that included a letter to the Company demanding that it be sold to the highest bidder or liquidating, alleging that the Company "has no reason to exist".

By April 4 2019, in response to pressure, the Company hired Houlihan to explore strategic alternatives.  They also moved their Annual Meeting to Q4 2019.

The Company had indeed been buying back stock as per Stilwell's suggestions.  They simply did not buy back enough to hit the 10% threshold and avoid a Proxy Contest.

Buyback Timeline:

Sept 30 2018 (705k shares ~ 5%)

Company says for the nine months ended September 30, 2018, it repurchased 705,711 shares of its outstanding common stock, or approximately 5.0% of the shares outstanding as of December 31, 2017.

Jan 14 2019: (announces 1.28m shares ~ 9%)

Company says it has repurchased 1,280,111 shares of its outstanding common stock under its share repurchase programs, or approximately 9.0% of the shares outstanding as of January 1, 2018.

As of January 14, 2019, the Company had approximately $6.2 million of repurchase authority remaining under the repurchase program announced on November 5, 2018.

Loan Book

At the time of its IPO, ABDC's book was only 38% first lien debt and contained a whopping 29% equity exposure.

Today, the book is 72% first lien with negligible equity exposure.  The book has a weighted average yield of 11.0%.

At its peak, the book contained 37 investments.  Today it stands at 30.

At December 31, 2018:

Average portfolio company investment at amortized cost and fair value was approximately $8.7 million and $6.9 million, respectively.

Largest portfolio company investment by amortized cost and fair value was approximately $22.7 million and $22.9 million, respectively.

86.9% of debt investments bore interest based on floating rates (subject to interest rate floors), such as LIBOR, and

13.1% bear interest at fixed rates.

NAV per share has continued to stabilize, actually increasing by $0.05 per share since Q3 2018.

In fact, ABDC was only one of 5 BDCs out of 44 reporting to have increased their NAV per share in Q4 2018. However – as the CEO noted on the conference call, this had a lot to do with buying back deeply discounted stock.  (source: BDC Reporter).

A list of the Company's holdings can be found here:  https://bit.ly/2IvzY6i

Bank of NY Mellon

BNY Mellon no longer owns any reported position in ABDC, and Management and insiders own very little stock.  It seems that Stilwell's campaign is focused on dragging BONY-M through the mud, claiming that they are the only ones to benefit from this failed stock via their management fees.  We think that BONY-M will be averse to having this type of press persist in the marketplace for obvious reasons, and will thus be aligned with having a sale happen quickly.

Upside Scenarios:

There are a few ways to triangulate to what ABDC could be worth.

1. Placing a value on the entire public company based on the earnings that a capable team could expect to generate on the Company's equity.

2. Valuing just the loan book.

3. Valuing the loan book plus the Management contract.

***

1. Placing a value on the entire public company based on the earnings that a capable team could expect to generate on the Company's equity.  (Note: we conservatively estimate two dividends are paid before closing).

2. Valuing just the loan book through an end of year sale (again, we conservatively estimate two dividends are paid before closing).

3. Valuing the loan book plus the Management contract.

Downside Risk

"As of December 31, 2018 over $57mn of investment assets at cost – more than a fifth of the total – were still valued as under-performing to varying degrees."

If the entirety of this $57m were written down to $0 (highly unlikely), NAV would fall to $6.70 per share versus a share price of $7.92 today.

Catalyst

- Houlihan runs a process and sells the Company for something close to NAV.

- Stilwell obtains Board representation and foreces the co to back more stock.

- Stilwell obtains Board representation, terminates the contract with the current Management Company, and sells the contract to a third party - buys back shares with the proceeds.