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Triangle Capital undertakes ‘strategic review’

The mid-market lender cut its dividend by 33% and reduced its annual net investment income outlook.

Triangle Capital Corporation may be headed in a new direction as the firm’s board stops to survey the business development company landscape and see if the firm can chart a new course.

The Raleigh, North Carolina-based BDC announced last week its board will “evaluate strategic alternatives”, which could include a sale of some assets or the firm, executives said on its third-quarter earnings call.

“Given the rapid change occurring in the industry, our board believes it would be short sighted of us to blindly forge ahead without going up periscope to see if other options to maximize value on behalf of our shareholders exist,” chairman and chief executive officer Ashton Poole said on the call.

“Given the rapid change occurring in the industry, our board believes it would be short sighted of us to blindly forge ahead without going up periscope to see if other options to maximize value on behalf of our shareholders exist

The firm posted an 11 percent quarter-on-quarter drop in its net asset value per share from $14.83 as of 30 June to $13.20 as of 30 September. It also cut its dividend by one-third, from 45 cents a share to 30 cents a share.

Poole revised the firm’s annual run rate for net investment income per share down from $1.60 a share to $1.35 a share, a drop he attributed to “credit quality”, as he said the firm posted an annualised 22 cents a share due to new nonaccruals. Loans on nonaccrual accounted for 13.4 percent of the total portfolio cost and 4.7 percent of the total portfolio’s fair value.

The firm attributed the “recent underperformance”, as described by Poole, to investments made in 2014 and 2015, when an abundance of capital flowed into direct lending. As a result, the pricing compressed and leverage crept up.

Triangle’s  investment professionals recommended a move from a strategy centered on investments in mezzanine and junior debt to commitments made in senior debt, Poole said. However, a change was not made until last year when he took the reins of the BDC.

A Wells Fargo research note posits two “ideal buyers” for Triangle, either a new entrant or an established BDC manager with a BDC that is trading at a premium to NAV per share.

If the same economics of Oaktree Capital Management’s purchase of Fifth Street Asset Management’s two BDCs were applied – a deal in which the $320 million purchase price represented 24 percent of the vehicles’ combined equity base – the purchase price would be $152 million, according to the note.

The firm’s investment portfolio stood at $1.09 billion, 48 percent of which is “TCAP 2.0”, or investments made under the firm’s new senior-focused strategy, the Wells Fargo note showed. Those investments are performing. Meanwhile, the seven investments put on nonaccrual were legacy positions.

Poole could not be reached for additional comment.