FSIC, CCT delay plans to merge public and private BDCs

Both firms’ stocks are trading at a significant discount, with FSIC’s at some of its lowest levels since going public in April 2014.

FS Investment Corporation (FSIC) and Corporate Capital Trust (CCT) have set aside plans to merge their publicly-traded business development companies with their four non-traded BDCs.

The firms announced the development on their respective third-quarter earnings calls, with both management teams citing stock prices as a driving factor in the decision. Both firms are trading at consequential discounts to book. If market conditions improve and the transaction would be accretive to shareholders, then FSIC and CCT might proceed with the proposed public vehicle-private vehicle merger, the firms said.

Philadelphia-based FSIC’s stock was priced at $6.65 at 1pm on Thursday against a net asset value per share of $8.64 as of 30 September. For its part, New York-based CCT is trading at $14.78 as of the same time against a NAV per share of $19.44 at the end of the third quarter.

FSIC is trading near its low of the last twelve months of $6.22, while CCT is trading more than $1.00 above its low in that timeframe, which was $13.69.

Neither firm announced any specific share buyback program due to regulatory constraints while the merger is pending. However, FSIC and CCT management emphasized that when their stock is trading at a “meaningful discount”, the firms have historically executed share buybacks.

For the third quarter, FSIC’s non-accruals ticked up, as the BDC’s losses outpaced its net investment income (NII). The mid-market lender reported a $0.05-a-share loss after posting a NII per share of $0.23 and realised and unrealised losses of $0.28 a share.

FSIC put three new names on non-accrual during the three months ending 30 September, causing the percentage of such investments based on fair value to increase from 0.2 percent as of 30 June to 2.71 percent. The percentage of positions on non-accrual at cost is 5.75 percent, according to LPC BDC Collateral.

“We are disappointed with our performance. We expect this process will take some time as we turn the corner,” chief executive Michael Forman said on the third-quarter earnings call, adding that FSIC “accepts full responsibility for these issues”.

The firm has five investments on non-accrual: aircraft part distributor HM Dunn Co., food processing machinery part supplier MB Precision Holdings, steakhouse restaurant Logan’s Roadhouse, energy-efficient lighting manufacturer Advanced Lighting Technologies and heat exchanger designer ThermaSys Corporation.

Corporate Capital Trust posted slightly better results, reporting a $0.25 earnings per share consisting of a $0.35-a-share net investment income partially offset by $0.10 in realised and unrealised losses.

In response to a question from Wells Fargo analyst Finian O’Shea regarding FS’s performance and the benefits of the merger for the CCT shareholders, CCT president Todd Buillone emphasised that the firms “continue to focus on the strategic drivers” of the merger. Those include cost savings, lower capital costs and portfolio diversification, he said.

Editor’s note: The story has been updated with comments from the managers that any potential combination of the public and private BDCs must be beneficial to shareholders.