The two rivals in a bidding war for TICC Capital Corp’s BDC have both urged shareholders to back them on the proposed takeover of TICC’s investment manager.
TPG Specialty Lending (TSLX) submitted proxy materials with the Securities and Exchange Commission urging TICC’s shareholders to vote against the takeover by Benefit Street Partners (BSP) at a special meeting on 27 October.
BSP submitted its proposal to acquire the TICC investment advisor in August. BSP hopes to acquire the management contract from TICC’s board by buying out the current investment manager for $60 million, according to several analyst reports and proxy statements. (BSP and TICC never confirmed the figure).
Critics of the offer, including TSLX and independent industry analysts, argue that the payment is undeserved by a manager that has underperformed multiple indices for years.
According to Wells Fargo Securities’ senior research analyst Jonathan Bock, the BDC has underperformed both the Wells Fargo BDC index and the S&P 500 by 12.1 percent and 20.9 percent, respectively, over the past year. Since inception in October 2004, TICC has underperformed the indices by 71.5 percent and 46.4 percent, respectively.
TSLX submitted a competing proposal for the BDC, rather than the manager, arguing that BSP offers no premium to shareholders and pays the underperforming manager an undeserved $60 million. TSLX has offered TICC common stockholders TSLX shares equivalent to $7.50 in value, a 20 percent premium to the trading price of TICC’s equity the day before the offer.
TICC’s board dismissed the TSLX offer and has recommended the BSP deal to its shareholders.
TICC characterised the TSLX offer as dilutive to its shareholders as the price offered is under net asset value (NAV), which stood at $8.60 per share as of 30 June. TICC has been trading at a deep discount to NAV this year with shares at $6.80 on Thursday, while TSLX was trading at $16.99, a premium to NAV.
TICC also claims TSLX will cut the dividend.
However, experts argue that whoever takes over TICC, the dividend will be reduced as the firm is not earning enough to cover its current return policy. TICC’s second quarter dividend was a cash payment totalling $17.4 million, while its adjusted cash flow stood at minus $1 million in the same period – making the payout essentially capital return, rather than yield earned.
The argument turns personal
BDC analysts and equity portfolio managers have criticised TICC’s decision to recommend the BSP offer. The most vocal critics point out that the independent members, Steven Novak, Peter O’Brien and Tonia Pankopf, have been in place since 2003 and have longstanding ties with the leadership of the firm.
Jonathan Cohen and Charles Royce are interested directors. Cohen is chief executive of the BDC, while Royce also serves as chief executive The Royce Funds, a group of small-cap equity mutual funds that employs TICC as an investment advisor.
The BDC set up a special committee to assess the various offers. The firm said it was best positioned to make a fair decision on which offer had the best value for TICC shareholders as they were TICC shareholders themselves and were not in line to benefit in any other way from a sale.
However, Wells Fargo’s Bock said that, in addition to Cohen and Royce, O’Brien, who is on the special committee, is also on the board of The Royce Funds, from whom he received over $280,000 in compensation.
“If O’Brien were to support another transaction other than the BSP offer, he would be supporting a deal that would take any potential payment away from Royce,” Bock wrote in his latest report on the deal. “With Mr Royce paying O’Brien a hefty salary to sit on the board of The Royce Funds, we could assume that O’Brien would not want to burn any bridges with Royce.”
The extent of the board’s independence has also been called into question by some who point out that under the BSP offer, the current board members would remain in place (though BSP planned to add four more independent directors for a total nine-member board). The TSLX deal would replace the trustees with TSLX’s current board.
TICC’s board members declined to comment on the deal or their various interests relating to it.
BSP also issued on open letter to TICC stockholders this week, saying it would fund a share repurchase programme or tender offer for TICC stock of $50 million-$100 million.
“The purpose of such a programme would be to immediately reduce or eliminate the market price discount of TICC’s shares to net asset value,” said BSP’s statement. “We think an appropriate minimum tender offer price would be no less than the current average price to net asset value ratio for large-cap BDCs (which is approximately 90 percent today).”
BSP also said it would cut the fees to 1.5 percent from 2 percent and reduce leverage in the BDC from 0.97x, although the firm declined to say to what level leverage would drop and has declined comment on the matter beyond its public statements. But as Well Fargo’s Bock pointed out, BSP’s stock repurchase agreement would have cut leverage before repurchasing any shares.
BSP, which manages several credit products, including private debt funds, CLOs, credit hedge funds, has been looking to make inroads into the BDC space. In February, the firm started a private BDC in partnership with California-based Griffin Capital. That vehicle is still trying to ramp its assets, while the TICC transaction would launch BSP into the publicly-traded BDC space with a decent asset base.
BSP has said it plans to turn TICC’s investments towards more privately-originated transactions and away from broadly syndicated loans and CLOs, which analysts agree would put its performance on a better track in the long-run.
Bock said: “BSP is a strong manager. It is affiliated with a well-known private equity firm, sources unique transactions and has an adept, well-respected management team. This puts it in the class of other well-respected folks such as Ares, TPG, Golub and Antares.”
In the battle of wills surrounding the fate of TICC, BSP has not been criticised. Observers rather reserve their ire for the board preferring to channel cash to the manager, rather than taking the premium over TICC’s current trading levels which would directly and immediately benefit shareholders.
BSP’s offer for TICC prompted the proposals from other interested parties, though as TICC has already signed a preliminary agreement with BSP and rejected the others, the board is only obligated to put the BSP offer to its shareholders.
Analysts say the board may have to reject the BSP proposal to save face, though this does not mean TICC management will have to engage with TSLX. One other option would be to liquidate the portfolio and some industry observers have posited that the firm will ultimately go in that direction.
TICC shareholders vote on the BSP offer on 27 October.