Alcentra Capital Corporation is shifting from deploying capital into the subordinated debt of lower mid-market businesses to the senior debt of larger businesses, the firm’s executives said on its fourth-quarter earnings call on Thursday.
The firm, indirectly advised by Bank of New York Mellon-owned Alcentra, said it will focus on reducing its exposure to loans on nonaccrual and harvesting out its underperforming loans. It will then deploy that capital into investments higher in the capital structure.
“2017 was a challenging year for Alcentra Capital Corporation,” said chief executive David Scopelliti, explaining the firm would rather make safer, lower-yielding investments than riskier, higher-yielding investments.
Executives pointed out Alcentra had already increased its percentage of first lien senior secured loans in its portfolio from 48.3 percent as of 30 September to 61.7 percent as of 31 December.
It also plans to lower its debt-to-equity ratio from its current 0.9x to its target of 0.7x and pursue other “income opportunities” with the 30 percent of its portfolio not statutorily required to be invested in US mid-market loans.
The New York-based business development company’s net asset value per share tumbled 9.62 percent from $12.27 at the end of the third quarter to $11.09 at the end of the fourth quarter. The firm’s stock price dropped more than 19 percent to $6.27 as of 2:02 pm, its lowest levels since it went public in May 2014. The share price closed Wednesday at $7.75 before earnings were announced.
Alcentra also trimmed its dividend for the second quarter in a row, reducing it to 18 cents a share this quarter from 25 cents a share last quarter. In the third quarter, the company paid a dividend of 34 cents a share.
Management said the firm wants to ensure its dividend policy reflects the portfolio’s earnings potential going forward. Alcentra reported net investment income (NII) of $4 million, or 28 cents a share.
Fielding a question from KBW analyst Ryan Lynch, Scopelliti said Alcentra anticipates its NII a share will decrease as it moves into lower-yielding first lien senior secured investments. The shift will bring that figure closer to the 18-cents-a-share dividend. Scopelliti added that Alcentra set the dividend plan on its anticipated earnings for the calendar year.
The firm also amended its $135 million credit facility with ING Capital, easing several financial covenants, the firm’s annual report said.
Alcentra reduced its asset coverage ratio from 2.25 to 2.0 and the firm’s net worth requirement from $149.56 million to $126.2 million. Another altered statute under the facility, on which Alcentra had $89.7 million outstanding, lowered the minimum stockholders’ equity ratio.
All the changes to the credit facility applied to the period from 31 December 2016 through 30 June.
The firm’s investment activity in the quarter included a commitment of $19.3 million first lien senior secured debt priced at LIBOR plus 8.25 percent in Cirrus Medical Staffing. Alcentra also refinanced the firm’s second lien debt at 12.25 percent and first lien senior secured debt at LIBOR plus 8 percent in Healthcare of Associates. It put $15 million of fresh capital into the company.
Scopelliti had said the losses have come from smaller companies with higher customer concentration. Alcentra’s loans on nonaccrual were those of Media Storm, Southern Technical Institute and Show Media. The firm recorded unrealised depreciation of $28.6 million, which included losses on its three nonaccrual investments and GST Autoleather, which filed for bankruptcy last year, and Conisus.
The BDC has drawn the attention of an activist investor. New York-based Stilwell Holding, a hedge fund and family office, has upped its stake in the firm from 7.2 percent to 8.5 percent, according to Securities and Exchange Commission filing submitted earlier this month.
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.
In addition to its BDC, the larger Alcentra platform is also investing in senior and mezzanine loans, special situations, structured credit, multi-strategy vehicles and high yield bonds. It has offices in Boston, Hong Kong, London, New York and Singapore.
Editor’s note: Conisus did not file for bankruptcy. The story has been updated to reflect that.