Activist hedge fund increases stake in Alcentra BDC by 1.3%

The development comes on the heels of some credit quality issues in the New York-based mid-market lender's portfolio, which were announced for the third quarter.

Activist investor Stilwell Holding has upped its position in Alcentra’s business development company, a stake it first disclosed in late December.

New York-based Stilwell, a hedge fund and family office, has upped its stake in the firm from 7.2 percent to 8.5 percent in Alcentra Capital Corporation (ABDC), according to Securities and Exchange Commission filing submitted Friday.

The investor stated its purpose is to “profit from the appreciation of the stock” via “asserting shareholder rights”, and that it intends to “work” with ABDC to bring its stock price closer to book value. The firm’s stock closed on Friday at $7.42, down slightly from Thursday’s $7.53. It was trading at $7.70 as of 1:25 pm Tuesday.

Stilwell, which declined to comment, did not state in the filing it intended to seek a sale of ABDC or obtain board representation. ABDC could not be reached for comment.

The mid-market lender’s net asset value per share has been trending downward over recent quarters. That figure stood at $12.27 as of 30 September, the most recent numbers, as ABDC has yet to report fourth-quarter and full-year earnings. That was a decrease from the $12.73 as of 30 June and $13.69 a share as of 30 September 2016, according to the firm’s quarterly reports at the time.

In the third quarter, ABDC reported net investment income of $4.8 million, or 34 cents a share, and authorised an open-market stock repurchase programme.

Some credit issues have crept up in ABDC’s portfolio. Three loans – investments in GST Autoleather, Media Storm and Show Media – were on non-accrual as of 30 September. The firm also realised a loss of $10.4 million on its investment in My Alarm Center.

GST, a Southfield, Michigan-based leathermaker for cars on which ABDC is a mezzanine lender, subsequently filed a bankruptcy petition in early October. Triangle Capital Corporation, which has put itself up for sale, and Main Street Capital Corporation are also creditors in the bankruptcy, according to their recent earnings reports.

Ellida McMillan, ABDC’s chief financial officer, said in its third-quarter earnings release: “Although the earnings capability of the portfolio has been reduced due to recent performance of certain credits, the strategy going forward will allow us to generate income without reducing the quality of our portfolio or reaching for yield.”

At that time the  firm also announced a dividend cut from 34 cents a share to 25 cents for the fourth quarter. ABDC chief executive and chief investment officer David Scopelliti said the firm’s “view on dividend policy” is to pay stockholders distributions “based on the earnings potential of the portfolio”.

Recent investment and portfolio activity includes the sale of IFT and Stancor investments at par, the full repayment of Graco Supply Company, a $2.5 million add-on financing for Medsurant Holdings, a $7 million second lien loan to an unspecified healthcare services and a debt-for-preferred equity swap with Conisus, the firm announced in January.

In the same statement, Paul Hatfield, then the firm’s global co-chief investment officer and president, took over chairmanship of ABDC from Paul Echausse, who left to build out a “new initiative” at a non-profit.

In its SEC filing, Stilwell lists a long track record of investments resulting in a sale or merger of various financial companies.

Most recently, the hedge fund’s stake in Jacksonville Bancorp and First Federal of Northern Michigan Bancorp resulted in mergers last month. Jacksonville merged with CNB Bank Shares, while First Federal combined with Mackinac Financial Corporation. Also, Stilwell’s investment in Anchor Bancorp, which dates back to July 2016, resulted in Washington Federal purchasing Anchor for $63.9 million in April 2017.

ABDC is advised by a subsidiary of the Alcentra Group, which is part of the Bank of New York Mellon. As a lower mid-market lender, ABDC targets companies with $5 million-$25 million in EBITDA.

The firm’s portfolio consisted of 78 percent first lien senior secured loans; 38.69 percent of senior subordinated loans; 30.24 percent of second lien senior secured; and 14.57 percent classified as equity investments or other securities. Its three largest sector exposures were healthcare services, telecommunications and security, accounting for slightly more than half of the portfolio.