Activist investor Stilwell ups stakes in THL Credit and Garrison BDCs

The Stilwell Group, fresh off the victory of its activist campaign against Alcentra Capital Corporation (ABDC), has upped its stake in both Garrison Capital Corporation (GARS) and THL Credit Incorporated (TCRD), according to Securities and Exchange Commission regulatory filings.

New York-based Stilwell, a family office and private investment firm, reported a 1.78 percent stake in GARS and a 1.05 percent position in TCRD as of 30 June. The value of those investments stood at $1.98 million for GARS and $3.23 million for TCRD. Stilwell initiated both positions in the first quarter of the year, buying a 0.90 percent stake in GARS and a 1.05 percent stake in TCRD.

TCRD declined to comment. Stilwell and GARS were not available for comment by press time.

Rounding out its BDC positions, Stilwell has two other business development company names in its portfolio. It also slightly upped its position in Great Elm Capital Corporation (GECC) from 0.17 percent to 0.18 percent. Stilwell held its position in MVC Capital constant. Neither GECC nor MVC could be reached for comment by press time.

While the stakes in GARS, GECC and TCRD increased, they are still relatively small compared to the initial buy Stilwell made in ABDC. In the fourth quarter of 2017, the activist reported a 7.45 percent stake.

The Stilwell Group launched a proxy fight against ABDC in late January when it named two board nominees: the activist investor’s director of research and a financial services attorney. Stilwell did so after ABDC did not repurchase at least 10 percent of its shares, which was Stilwell’s request to avoid a proxy fight.

Alcentra announced in April that a committee of independent directors had hired investment bank Houlihan Lokey for a strategic review, less than three months after Stilwell put forward the two candidates. The process ended earlier this month with Crescent Capital BDC purchasing Alcentra.

THL’s first-lien focus

TCRD is executing a turnaround plan that the firm outlined in March 2018 during its fourth-quarter 2017 results announcement. Since then, it has focused on first-lien senior secured loans to private equity-backed companies, shifting away from the junior debt investments made in non-private equity-backed companies in 2012-13.

According to a transcript of the second-quarter earnings call earlier this month, TCRD chief executive Christopher Flynn addressed the matter: “We remain confident in our plan we’ve outlined, and we believe we’ve made progress executing it. As a result, we believe the risk in our portfolio has significantly decreased over the last 18 months, and we remain well-positioned to deliver solid performance in 2020.”

Over the course of the turnaround plan, the firm’s net asset value per share has decreased 19.22 percent from $10.51 in the fourth quarter of 2017 to $8.49 as of 30 June. Flynn said the second quarter’s NAV per share decline was due to two credits: retailer Charming Charlie, which is liquidating in a chapter 11 bankruptcy proceeding, and manufacturer LAI International, which was sold in June.

The firm’s portfolio consists of 63.52 percent first-lien senior secured loans, 5.50 percent second-lien senior secured loans, 1.45 percent subordinated debt, 10.86 percent equity stakes and 18.66 percent positions categorised as “other”, according to LPC BDC Collateral. Non-accrual loans were 1.81 percent of the portfolio at fair value and 7.80 percent at cost.

Garrison’s gravitation to more liquid credits

For its part, GARS has seen the share of directly originated lower mid-market deals in its portfolio decline, chief investment officer Mitch Drucker said on the BDC’s second-quarter earnings call. Its share of club deals and positions in broadly syndicated loans have increased as a result of poorer deal terms in directly originated deals.

“The quality of dealflow and aggressive debt structures have led to a decrease in actionable transactions,” Drucker said.

Larger investments in more liquid credits and group transactions have been a focus in recent quarters. On the first-quarter earnings call in May, Drucker explained that the bigger borrowers can be more attractive in a topsy-turvy market.

“These larger companies tend to be more durable and resilient in the event of economic volatility,” he said.

GARS has also dealt with a declining NAV per share figure, dropping 11.89 percent over the same fourth quarter of 2017 to 30 June 2019 timeframe. It decreased from $11.69 to $10.30.

The GARS portfolio consists of 95.92 percent first-lien senior secured loans and 4.08 percent equity stakes, according to BDC Collateral. The firm listed 0.70 percent of its loans on non-accrual at fair value and 0.86 percent at cost.

TCRD is overseen by THL Credit, a Boston-based credit manager that manages $16.8 billion in assets. In addition to the BDC, THL also invests in direct lending through private funds and manages collateralised loan obligations. Garrison Investment Group advises GARS. In addition to direct lending, the firm invests in real estate debt equity and debt, portfolios of consumer and commercial financial assets, asset-based loans and distressed credit.