Credit quality ticks up at Garrison as it resolves four non-accruals

The firm posted a net investment income for the year of $1.08 per share, falling just short of the $1.12 in dividends it paid out last year.

The credit quality in Garrison Capital’s portfolio showed improvement in the fourth quarter as it resolved four of its five investments on non-accrual status, though its lower-rated investments still comprised almost half of the portfolio.

The average rating of the New York-based business development company’s investments – which rates its credits on risk ratings of 1-4, with 1 being the highest and 4 the lowest – improved from a 2.7 to a 2.4, executives said on a Thursday earnings call. Some 48.9 percent are rated three or four, down from 53.5 percent as of 30 September.

“This was primarily driven by the upgrade of several credits in the portfolio and the resolution of our non-accrual assets,” Mitch Drucker, Garrison’s chief investment officer, said on the call.

As of year-end, 47.8 percent are rated three,  defined as having at least “market rate expected loss of principal and potential non-compliance with financial covenants”, according to Securities and Exchange Commission regulatory documents; 1.1 percent of the portfolio investments are defined as having  “an expected loss of principal”.

The firm said it resolved four of the five non-accruals that were on its books – Forest Park Hill Medical Center at San Antonio, Walnut Hill Physicians’ Hospital, Badlands Production Company, and Speed Commerce Production Company and Speed Commerce Investment Partners..

Only Rooster Energy remained on non-accrual and has had a reorganisation plan approved by a bankruptcy court that would see the lender group, which includes Garrison, receive all of the reogranised debtors’ equity.

Garrison reported $1.07-a-share net investment income for 2017, offset by a 68-cents-a-share loss, resulting in an earnings-per-share of 38 cents. For the year, the firm posted net realised losses of $25.6 million for the year and unrealised gains of $14.4 million in 2017.

That was a marked uptick from the 30-cents-a-share loss Garrison recorded in 2016. That year, the firm reported a $1.18-a-share net investment income against a $1.48-a-share net realised and unrealised loss.

Net investment income for the fourth quarter was $4.3 million, or 27 cents a share, against a 4-cents-a-share net realised and unrealised loss, for an earnings per share of 23 cents. In the third quarter, the net investment income was $4.2 million, or 26 cents a share, plus a 1-cent-a-share unrealised and realised gain, for an earnings per share of 27 cents.

The firm invests in mid-market companies, putting in $5 million-$25 million per transaction. The firm targets 10 percent-15 percent of unlevered annual effective yield.