When Benefit Street Partners (BSP) announced with TICC Capital Corp in August that it had agreed to buy the business development company’s investment manager it was unlikely that they were expecting what followed.
Two counter offers, allegations of rewarding failure and a court order later, and the future ofTICC seems little clearer.
First came NexPoint Advisors with a rival bid for the $1 billion BDC’s manager, followed by an offer from TPG Specialty Lending (TSLX).
The process should have come to a head in October when TICC shareholders were due to vote on the BSP bid, but that was postponed after a Connecticut court intervened when NexPoint sued the TICC board.
Naturally, all sides say theirs is the best bid, but the decision facing shareholders is far from straightforward. BSP is buying the manager, NexPoint is also seeking the management contract by offering to cut fees and TSLX is seeking an all-equity merger.
At the heart of the battle is BSP’s offer to pay cash to the exiting investment manager – a detail that has raised eyebrows among industry observers who argue that a manager underperforming the market should not be rewarded.
Tom Surgent, chief compliance officer at NexPoint parent Highland Capital Management, believes the BSP payment to management, based on estimations byWells Fargo’s senior analyst Jonathan Bock, was initially around $132 million, coming down to $60 million following industry criticism and now standing at $10 million and an unvalued 24.9 per- cent manager stake.
Nobody has directly criticised BSP for bidding. Rather they take issue with the TICC directors’ handling of the process and the potential conflicts embedded in their preference for BSP’s offer. Industry observers also point out that the game is rigged by nature. A number of underperforming BDCs collect fees without interruption and most wouldn’t sell unless there were a premium offered. So for a firm like BSP, which wants to get into the BDC space
quickly, a buyout is the direct route. BSP’s plans for TICC involve pivoting it towards directly originated investments to improve performance. Analysts agree BSP’s strategy would put the vehicle on better footing in the long-run.
While the situation is painful for all parties, industry experts tell PDI the conundrum is actually good for the BDC space, as it has underlined several inherent problems. These include the handsome fees earned by BDC man- agers even while underperforming for years; the fact that board members often also wear investment manager hats (and how many people fire themselves?); the opaque negotiations of sales/investment contracts that don’t appear to give full consideration to shareholders; and the lack of term limits on directors.
As PDI was going to press, TICC’s fate was still unknown, but it’s clear that updated offers from the competing firms have included more benefits to shareholders.
A FLAWED PROCESS
TICC, which declined to comment for this article, has come in for criticism on all sides for how it has handled the situation. NexPoint argues that the BSP agreement was a “rigged Soviet-style election” that only benefits management.
Sources tell PDI that TICC appointed UBS to sift through candidates to replace the manager. But shareholders were not involved and it’s unclear which other candidates UBS looked at.
A UBS spokeswoman declined to comment.
TICC announced it was also using Morgan Stanley and Wachtell, Lipton, Rosen & Katz as advisors, though following litigation by NexPoint, court disclosures showed that to be misleading, Highland’s Surgent says. Some of TICC's statements suggested that the advisers had looked at all the offers on the table, when in fact the two firms were hired only after NexPoint's and TSLX's competing bids were already rejected.
TICC rejected TPG’s original share offer arguing that shareholders would lose out as the deal prices the equity below book value –TPG’s latest offer equates to 90 percent of net asset value (NAV).
It also argues that TSLX has high fees and is only seeking to inflate its fees with a larger asset base. TSLX’s charges a 1.5 percent management fee and a 17.5 percent performance fee on a 6 percent hurdle rate, which industry observers say is about standard.
Josh Easterly, TSLX’s chief executive, points out that if he was in it for the fees TSLX could just issue fresh equity. TSLX has been one of the best performing BDCssince going public in 2014 and is one of very few currently trading at a premium to NAV.
Given that the vehicle already has scale and strong returns,TSLX doesn’t have the same need to acquire a BDC as BSP or Highland.
Asked why he got involved in this mess, Easterly says it was because he wanted shareholders to be treated fairly. “The eco-system has to be healthy for the industry to grow,” he says.
Even if BSP’s consideration to management is much lower than originally thought, Easterly still doesn’t think it’s warranted: “Any dollars going to an underperforming manager who is no longer going to be in business is bad for shareholders.”
So while the battle goes on, the so-far thwarted bidders are clinging to their one point of success.
“Our efforts to create value for stock- holders have also cast a public spotlight upon the unfortunate and inappropriate way in which transactions like these are negotiated behind closed doors. Such dealings fundamentally disadvantage stockholders and are something that needs to change industry-wide,” Surgent says.
It’s true that there’s been a wave of stock repurchase programmes announced in recent weeks and public criticism among institutional shareholders of BDCs.
Easterly says he wants to see a healthy industry with more stock buybacks, non- dilutive equity raises and boards that have a process to deal with underperforming managers. Some of this is already starting to happen.
Maybe the industry is changing for the better, and perhaps it’s thanks to the TICC fiasco, whatever the outcome.
TICC Capital Corp
The object of three offers, TICC was founded in 2003 by chief executive Jonathan Cohen, president and chief operating officer Saul Rosenthal and chief financial officer Bruce Rubin. The $1 billion Greenwich, Connecticut-based BDC invests mostly in broadly syndicated loans, CLO equity and debt, but has underperformed all relevant indices, including the Wells Fargo BDC index, the S&P 500 and even US Treasuries since inception, according to analysts. Its share price has fallen from $15 to less than $7, while NAV recently declined due to $41.4 million in unrealised losses.
TICC has admitted breaking its 1:1 regulatory leverage limit, reaching 1.07x debt to equity, which Jonathan Bock, Wells Fargo’s senior analyst specialising in BDCs, says could force it to sell assets. TICC is planning a $75 million share repurchase programme, though it can’t repurchase shares while in breach of its leverage limit. [Since PDI went to press, TICC announced it had sold $117 million worth of syndicated loans at a weighted average price of 98.9 percent to reduce leverage].*
ONE-YEAR PERFORMANCE (to 15 September)
- TICC: -21.3 percent
- Wells Fargo BDC Index: -9.2 percent
- S&P 500: -0.3 percent
Benefit Street Partners
Led by president Rich Byrne the $11 billion credit arm of Providence Equity Partners has been looking to get into the BDC space and in February launched a private vehicle with Griffin Capital, though it has negligible assets.
TICC OFFER: BSP announced its deal to acquire TICC in August. Terms weren’t disclosed, though Wells Fargo’s Bock suggested the agreement would hand $60 million to the outgoing manager.
Following a court order, BSP disclosed that it agreed to give TICC’s outgoing manager $10 million in cash and a 24.9 percent stake in the new manager. The cash value of that stake is unclear. BSP declined to comment, but sources close to the firm tell PDI that the number is much lower than $60 million.
BSP sweetened its offer in October with a $50 million-$100 million share repurchase plan and a 50bps cut in management fees to 1.5 percent. It has since offered to lower fees to 1.25 percent while transitioning the portfolio to direct loans.
An affiliate of Texas hedge fund firm Highland Capital Management, NexPoint runs a 1940 Act credit fund that also invests in broadly syndicated loans and CLOs. NexPoint also has a tiny BDC and has been looking to grow in the space. Its NexPoint Credit Strategies Fund, launched in 2006, has $643 million in assets and trades under “NHF”.
TICC OFFER: The firm submitted a competing bid for theinvestment manager contract in August, offering a 50 percent reduction in the base fee for three years, waiving the first $5 million in fees and the purchase of up to $10 million of TICC shares. It later updated its share repurchase offer to match BSP’s $50 million-$100 million offer. If it were to acquire the TICC portfolio, the Highland affiliate would keep investing it in syndicated loans and CLOs, though it would go through a portfolio review to assess weak performers.
TPG Specialty Lending
The $1.4 billion BDC is controlled by alternative investment firm TPG.
TICC OFFER: In September, TPG proposed to trade-in TICC shares for $7.50 each, a 20 percent premium to TICC’s then share price. TICC rejected the bid, arguing against selling at a discount to NAV, though TICC’s shares have been
Josh Easterly trading at a steep discount to book (about 26 percent in early November) for some time. TPG has been urging TICC shareholders to vote against the BSP proposal.
But even if they do, the TICC board is not obligated to engage with TPG. A source also points out that selling the management contract requires a two-thirds quorum, while an all-equity transaction requires 75 percent approval. TPG updated its offer to $7.74 per share on 2 November, a 10 percent discount to September book value. TICC has not yet responded to the new offer.
BSP and TICC announce that BSP will purchase TICC’s investment manager in order to win its contract and control of the firm’s $1 billion of assets. The manager is owned by several TICC board members. The payment to the former manager is rumoured to be $60 million.
NexPoint makes a rival bid for the investment manager contract for a lower fee percentage, waiving the first $5 million in fees and investing $10 million in TICC shares. The offer does not include a payment to the existing manager.
TPG makes an all-equity bid for TICC’s share capital, offering TSLX stock at a rate of 87 percent of TICC NAV, equivalent to a 20 percent premium to the BDC’s then trading price. TICC rejects both the NexPoint and TPG offers.
NexPoint seeks to have new members elected to the TICC board.
After NexPoint brings the case to court, a Connecticut judge orders BSP and TICC to reveal how much is being paid under their agreement.
The forced disclosures delay the planned shareholder vote on the BSP deal. BSP outlines its plan for a $50 million-$100 million share buyback scheme if it wins the deal, offers to cut its management fee to 1.5 percent and an even lower 1.25 percent management fee while transitioning the portfolio.
TPG increases its offer to the equivalent of 90 percent of NAV.
Shareholder vote has not yet been rescheduled.
*This story was updated on 4 December with information that was posted after PDI went to press.