THL CEO: ‘Risk return’ over ‘absolute return’, as NAV per share drops 7.3%

The publicly traded BDC said historic investments in junior debt and non-sponsored companies and a highly concentrated portfolio have caused the firm’s shares to trade at a discount to book.

THL Credit’s executives stood by its BDC on Wednesday’s earning call, as it emphasized a turnaround plan, following a more than 7 percent drop in net asset value per share for the fourth quarter.

The Boston-based business development company emphasised its plan to have a focus on first lien floating-rate loans to private equity-backed companies, and will prioritise “risk return” over “absolute return”, chief executive Chris Flynn said.

The BDC’s advisor, THL Credit Advisors, will also waive any incentive fees earned in 2018 and announced it would invest $10 million in the BDC. In the third-quarter earnings announcement THL’s advisor had said it changed the way it calculated its incentive fee, resulting in a lower fee.

“I’d like to address a consistent theme of questions and frustrations regarding our stock – specifically its performance and what we are doing as a team and as a platform to improve it,” Flynn said on Wednesday’s call. “Or asked slightly differently, I’m asked, ‘how did we get here?’ and ‘what can we do to make sure it’s not repeated?”’

Part of the answer, Flynn said, were junior capital investments and loans to non-sponsored companies over the 2012-2013 timeframe. The firm “may have been too slow to react to market conditions”, he said, and did not cut a 34-cents dividend soon enough.

Failure to trim the dividend “resulted in an investment strategy focused on higher yielding, higher risk assets”. A concentrated portfolio also influenced performance, he said, and pledged to keep future hold positions within 2.5 percent of the BDC’s book.

Facing tough questions from those on the call, Leon Cooper of Omega Advisors asked, “When do you reach the conclusion that there’s not money here, for the sponsor and the shareholders, and return book value to shareholders by liquidating the assets?”

“From our perspective, shrinking this portfolio and liquidating the assets is not the right answer,” Flynn responded. “Getting smaller in fact is probably the wrong answer. It’s being small that’s created part of this problem.”

He added the goal is to “support” the BDC to ensure the vehicle grows and eventually trades at a premium to book. THL reported a NAV per share of $10.51 as of 31 December, falling from $11.34 as of 30 September. The stock closed at $8.24 a share on Wednesday.

The private funds have been a bright spot for THL, management said, with THL Credit Direct Lending Fund III raising $511 million against a $350 million target. The private funds also give THL more “pockets” to distribute investments across, resulting in a less highly concentrated portfolio, something that Flynn acknowledged has been an issue for the firm’s BDC.

THL posted a net investment income of $8.7 million, or 27 cents share, meeting its 27-cents-a-share dividend. It invested $49.8 million in three new portfolio companies and five existing portfolio companies. Those investments included buying $28.2 million of debt in portfolio company Charming Charlie, a retailer that filed for bankruptcy in December, at 5 cents on the dollar.

Two other portfolio companies, C&K Market and Tri Star Management Services, are currently being shopped, but no deal for either has been announced yet. The firm has 7 percent, or $40 million, of its portfolio in non-yield-producing equity positions, Flynn said, a number he hopes to cut in half this year.

Aside from the private funds and BDC, which is traded on the Nasdaq exchange, THL also manages collateralised loan obligations and total return strategies. In addition to its Boston headquarters, the firm has offices in Dallas, Chicago, Los Angeles and New York.