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Solar Capital Ltd. (SLRC) Message Board

  • jackmaster20 jackmaster20 Dec 7, 2012 3:39 PM Flag

    quick SLRC portfolio non-acural calculation

    in 2012, SLRC has identified or re-structured
    portfolio debt originations as non-accurals.

    DS Waters
    Granite Global
    Direct Buy, Inc

    Below are my quick estimates of capital
    originally invested in these 3 firms.
    My estimates could be incorrect, but
    maybe they are in the "ballpark"

    DS Waters 75 million
    Granite Global 20 million
    Direct Buy, Inc 25 million

    Estimated total invested 120 million

    All of these have or will soon be "written
    off" to some extent, to allow SLRC to bring
    these holdings back to performing status.

    3Q SLRC portfolio value was 1170 million

    so I figure that approx. 10.25 % of original capital
    invested as a % of the current portfolio has been
    re-structured. All of these positions have or will
    go to PIK when placed back onto performing status.
    SLRC knows it can not prudently raise the quarterly
    if the PIK % of NII remains stubbornly high.
    Small money investors will not buy a phantom
    dividend payout for long.

    SLRC is advertised as a upper middle market
    mezz, subordinate loan BDC, I know there will
    be a portion of equity exposure in SLRC, but
    as I look at the SLRC portfolio, PIK earnings
    seems to counteract and slow NII cash income
    that flows to investors like us. SLRC appears to
    be slightly drifting toward a private equity fund
    income statement.

    If 10.25 % of placed capital that was originally
    invested, to fund NII and pay dividends, is not
    generating cash NII in the current relatively good
    times for BDC operators, what will happen to NII
    and dividend pay outs when a weak environment
    inevitably occurs ?

    I think this a major reason why SLRC stock
    price does not trade measurably higher than
    than its NAV other similar BDC stocks
    currently trade.

    Gross states in the CC non-accurals are less
    than 2 %, but isn't that after quarterly mark to
    market reductions in these 3 non-accurals ?

    I may be incorrect on these assumptions, that is
    why I post this for other to read and explain my

    Sentiment: Hold

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    • jackmaster20,
      After reading your last couple of posts I concluded you sure put a lot of thought into your work and that is a good thing. You also portray a bit of cynicism in your posts with your assumptions that appear to have a bit of a negative flavor. For example, DS Waters is not on "non-accrual" status and the preferred stock position, (and its' PIK income), (resulting from the re-structure) is not particularly troubling because the previous DSW notes were also PIK. So the current PIK income status of the DSW position has little to do with SLRC's ability to pay its' current $.60 dividend. It has always paid its' dividend from taxable income (no return of capital) and expects to continue to do so regardless of the old PIK income or the new PIK income from DSW. SLRC is not paying a "Phantom Dividend". Yes we would prefer NON-PIK to PIK income, but we have what we have. Current indications are that DSW is performing in line with current expectations and is increasing revenues. We may have to wait longer for payment of the PIK funds, but we could have even a bigger payday if SLRC monetizes that loan in the near future as they suggested they might do when conditions permit.
      Also, and as you point out, Granite and Direct Buy are on non-accrual. But they both should be back to accrual status this quarter. But to assume these two will go on PIK status after the re-structure is tough to justify. Neither was on PIK to start with. SLRC has not suggested they are going on PIK and none of the analyst comments I've heard or seen have hinted at PIK status for these two investments. In fact, SLRC has said that Granite Global will pay interest in Q4 as it comes off of non-accrual which tells us it is not headed for PIK status.
      In any event, thanks for your work. It has inspired additional activity on this board. I continue to have a very good feeling about SLRC and I will try to convey that sentiment by updating my October post. May have that done later today.
      Just one opinion.

    • Why would you call DS Waters a non accrual? It contributes PIK income each quarter via the preferred. 15% yield, I think.

      • 1 Reply to jdb_1234
      • My prose was inaccurate. I should have written more clearly that the DS Waters
        position had returned back to performing status last summer. This was an error
        in my ability to convey my thoughts. Sorry.

        Regarding the current re-structured 15 % perferreds you mentioned. DS Waters
        had a mishap before, in 2011, and therefore I am less likely to give the DSW position
        a "just fine" rating in my own mind. DS Waters is a 100 % PIK non-cash producing
        position and I definitely value lower this re-structured PIK deal, with its prospects for
        the future cash out profits less than performing cash paying positions. This is just my
        personal way of not getting too euphoric about equity like portions in the SLRC portfolio. Also the Street seems not to value SLRC stock on a % NAV basis as highly as other peer BDC. Could this be due to the % PIK as a total of NOI ?

        As a private investor in BDC securities, my personal philosophy is look to invest in
        BDCs who in general, originate strong debt positions that pay interest income and
        to shy away from the higher equity-like DBCs who seem to get into the most trouble.
        For my PIK-like asset allocation, I will simply buy higher growth small & mid cap stocks straight out.

        All BDC have some PIK component to their NOI, but I try to be aware and averse
        to BDCs that trend to larger PIK %. I feel its better to be conservative than to bank
        on re-stuctured PIK income as the basis for my rationale for future SLRC stock
        appreciation and certainly for any hopes for 2013 SLRC dividend raises.
        If the DS Waters 15 % PIK preferreds get bought out on favorable terms to SLRC,
        Good For Us ! But I look for steady management of NII growth for both steady
        dividend and stock price growth.

        As SLRC goes from .28 leverage to their targeted .65 leverage ratio in the several
        quarters ahead, I estimate that this could mean $ 525 million of portfolio originations.
        I would like to see Gross start now to build the portfolio cash-paying NII as a central
        goal to grow the dividend to $0.85 per quarter through prudent structured deals.

        If SLRC can grow a 85 cent quarterly NII by expanding the portfolio with a smaller
        % of PIK deals and maintain a sub 2 % non-accural portfolio.......can you estimate
        the SLRC stock price ? Happy thoughts !

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