So the shareholder loses NAV per share and dividend cuts while mgmt increases Management Fee AND Incentive Compensation?? Seriously, do they have any shame?? How do you get incentive compensation for big write-downs, reduction in NAV/share and reduced dividends? By what possible measure can they be paid an incentive fee -- how about a claw-back for destroying shareholder value?
The board and management should be embarrassed of this. If they had any integrity, they would forego the incentive compensation regardless of what is in their formula. If the BOARD cannot align management comp with shareholder success, they should have the decency to resign.
Incentive compensation for management and wage cuts for the rest of us. So much for incentive.
Spin it however you wish, but, somehow, I think several of the Commandments are being ignored.
You know, the ones about bearing false witness and coveting your neighbors goods.
I understand, though, that the neighbors partner is still fair game.
Not looking to defend FSC here but I would like to point out a few things.
Base management fee is based on fair value of their gross assets. If the fair value of their gross assets drops the base management fee will drop. The loss in BV has to do with the base management fee and has nothing to do with the incentive fee. And remember, the base management fee is paid in arrears.
Also worth mentioning is that FSC does not charge the base management fee for cash on the balance sheet. So FSC is not charging the base management fee on that $67mm in cash on the balance sheet as of September 30th. Very few BDC's do this.
If you look in the 10-K as to how they earn the incentive fee, you'll see they are clearly still earning the incentive fee (also paid in arrears), but if NII drops so will the incentive fee.
However, NII is not dropping, it's growing. Quarter over quarter FSC just reported a 21% increase in NII on an absolute basis and more importantly for shareholders a 12% increase in NII on a PER SHARE basis! Most BDC's reported lower NII on a per share this quarter compared to last quarter.
Last point. Don't know how closely you follow FSC but the dividend cut was not due to declining revenues. Revenues are clearly increasing on both an absolute and per share basis. It was due to a change in their dividend policy.
In the past FSC had been paying out virtually all of their taxable income. During the last few years because FSC has been growing so fast, FSC has had an appreciable amount of taxable income over and above what's reflected in NII. This is an aggressive dividend policy and really isn't the best policy as sooner or later the BDC is bound to have coverage shortfall problems.
What they switched to with the dividend cut is to covering the dividend with NII only. This is the more conservative dividend coverage policy and is the "gold standard" for the industry.
This will strengthen FSC's balance sheet and should be reflected in the share price at some point. I think by covering the dividend strictly from NII the share price will sooner return to trading at a premium to NAV than if they continued the dividend coverage policy they had been using.
My feeling is it's a some good news/some bad news kind of quarter, but it's definitely not as bad as you're making it out to be.
I agree with your articulation on WHY these things occurred, but I own shares in the company, not the company itself, so my returns are based on what happens to the marginal share. The net effect of mgmts decisions over the latest period is (a) a drop in NAV per share, and (b) a future cut in dividends. [And please don't buy into the concept of improving investment income when they take HUGE writedowns - they should not get rewarded for running *part* of the company, but the whole deal]. Even if EVERYTHING they have done was perfectly conceived and executed, the net effect is that they win BIG and I lose.
The Board should not compensate this team based on gross assets, it simply encourages them to raise money (regardless of dilution to us) in order to get paid. This period, the net effect of mgmt's stewardship of the business is that the company lost money and realized it's distribution policy is too aggressive. I can deal with this as a partial owner of the business, but it's challenging to swallow when the Board effectively tells us that shareholders need to deal with tough times while mgmt needs to line it's pockets at our expense. Computer formulas don't pay bonuses, Boards do. They need to change this so we win together instead of supporting mgmt's aspirations for a larger empire.