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TICC CLO earnings fall in Q1

High LIBOR pricing and an increase in CCC rated assets drove down CLO earnings in the first quarter for the Connecticut- based BDC.

TICC Capital (TICC) reported a $1.1 million decrease in income on debt investments in the first quarter of 2016 in its latest earnings call due largely to the repayment of a $150 million credit facility late last year and $49.3 million in common stock repurchases.

TICC also reported a $2.6 million reduction in its CLO equity investment income that chief executive officer Jonathan Cohen said was attributable to the increase in three-month LIBOR over the past six months.

“We note that the CLO equity market was significantly weak on a quarter-over-quarter basis but that we have seen a significant increase in prices within that market since quarters’ end,” said Cohen. In response to a question, Cohen also said that the deterioration of the weighted average rating factor on TICC’s CLOs followed from downgrades in syndicated corporate loans from the end of last year and at the beginning of 2016.

Overall, the company reported net investment income of approximately $4 million and net realised capital losses of $0.6 million in the first quarter of 2016. Total investment income in the period fell $3.5 million from the fourth quarter of 2015 to $15.3 million.

There were also $9.5 million in CLO markdowns for TICC in the first quarter, nearly half of the company’s $20.6 million in unrealised losses reported this week. These loses helped raise leverage above the regulatory limit and prompted an analyst to question why TICC had not sold more assets during the first three months of the year.

“The March quarter was really the low point in asset valuations and so we certainly didn’t want to sell either corporate loan assets or CLO equity assets that we expected would experience some price rebound over the course of the coming month, which is so far what’s been happening. The 1.15 or 115 percent ratio that we are referring to is obviously something that we expect to bring down over time,” responded Cohen. “But we don’t want to bring it down by selling assets at a discount to what we believe their true economic value to be,” he added.

Cohen declined to comment about the company’s previously-reported return into direct origination, saying that there had been some initial progress but that the company would wait before commenting publicly on the effort.

In a research note published after the call, Wells Fargo analyst Jonathan Bock questioned the company’s policy of issuing a $0.29 dividend, “substantially” higher than its peers, despite limited near-term liquidity. Bock wrote that a reduction in the dividend was likely as it is possible for CLO cashflows to decline further and Wells Fargo reduced its NOI/share estimates for this year and next by ten cents each.

“We believe that the current stock price reflects risks driven by the under-earned dividend and structured products exposure,” the report said.

TICC’s planned sale to Benefit Street Partners fell through in December due to lack of shareholder support and the company has not engaged with two competing offers. In March, TICC cut management fees and implemented a new high-water mark for incentive fees as part of an effort to appease shareholders.