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Solar Capital Ltd. Message Board

  • jan814_1999 jan814_1999 Mar 3, 2013 1:02 PM Flag

    CC Thoughts Pt 2

    Since the CC, I have seen one analyst report. That analyst, even though maintaining the "overweight" rating, has lowered both the 2013 and 2014 per share estimates because: a) near term investment growth is expected to be slow, b) Rug Doctor with its 17.5% yield is going on non-accrual, and c) the January equity offering of 6.3 million shares will cause a drag on Q1 NII. The 2013 NII estimate from this analyst is $2.42 per share which is less than the run rate we are at right now.

    I checked the First Call earnings projections and those EPS numbers have also been reduced for 2013 (6 analysts) and 2014 (4 analysts). The 2013 NII estimate is $2.55 per share which is close to our current run rate. For Q1, the projection is $.63 which is what the SLRC Q4 was.

    From what I am seeing so far, it appears that the Q1 boost in NII we hoped for from the Crystal portfolio acquisition has been more or less offset by the earnings per share decrease caused by the January equity offering. And that, if correct, is disappointing, at least for the near term.

    It may also be noteworthy that on the last few conference calls, management indicated they would cover the $.60 quarterly dividend with the next quarters NII. They made no such statement on this most recent CC. Maybe it was just an oversight, or maybe not.

    As always, just one opinion.

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    • Jan

      Regarding your 3rd paragragh, so buying Crystal Financial portfolio for $ 275 million, buying their
      debt for $ 143 million plus a $ 18 million transaction premium for $ 400 million & offering 6.4 million
      shares does not increase per share NII in early 2013. Why did Gross do this deal ?
      How does Gross benefit where the other shareholder do not ?

      As a long investor in SLRC, my last few posts have been my attempt to quantify the Crystal
      financial transaction for current shareholders. Maybe my data or methodology is inaccurate,
      but I hear or see no one else provide a forecast of this deal on SLRC NII, dividend or specific
      future prospects. All I heard from the CC was a vague estimate/range of what the Crystal
      deal with give to SLRC. So I have tried to figure out, for myself & others who care to read,
      a possible scenario for SLRC earnings/dividend in 2013. The analysts and mgmt gave no
      viable information (even though Gross says he has been working closely with Crystal for
      a year) so I try to formulate a set of numbers based on what I hear or can read..

      When I bought my SLRC position, I did not buy the dividend yield or the share price, I bought
      the talents or expertise of management. The ability to drive portfolio returns and ultimately
      a durable positive trend in NAV. If what you say is correct about 2013 per share
      NII, then it appears to me mgmt has done a "big deal" that does not benefit existing share-
      holders. Over the past 6 to 8 quarters, SLRC per share NII has been about the same.
      Dividend has been stable. The NAV & stock price has moved higher, but these metrics
      are more subjective.

      I simply would like to discover or arrive at a set of numbers that reflects SLRC actions.
      If you or The Shadow can provide a quantifiable summary of the Crystal transaction that
      takes into account variables that I miss and that SLRC mgmt did not clearly explain, I would
      appreciate your efforts. If I got it wrong I am willing to learn from others.


      • 1 Reply to jackmaster20
      • Just a couple of comments:
        Gross benefits by increasing the total assets upon which the management fee is calculated (now $275m greater with Crystal), plus the increase via the 1/13 secondary.
        In response to another question: I see no reason for the Crystal acquistion to do anything for NAV. SLRC bought certain assets (for an apparent premium over book value, which would have resulted in a decline in book value had Crystal been merged into SLRC instead of being treated as an independent subsidiary). The only way for this to change NAV in a postive way is if it was a merger and the assets were purchased below book value, instead of a premium, or if the assets appreciated.
        As to a separate question about the impact of the January secondary at above NAV pricing, and its impact on NAV, my calculations (which are always subject to mistakes), show that NAV increased from the 12/31/12 NAV of $22.70 to a new NAV (after secondary) of $22.77.
        Although I agree with Jan that dividends from Crystal do not come without a cost, it remains to be seen what those costs will be to SLRC shareholders. As everyone heard/read in the CC, mgmt said +/- 11% dividend from Crystal to SLRC. Mgmt did not say whether that was 11% of $275m or 11% of $400m, but apparently IR has said it is 11% of $275m (which makes sense and I don't dispute what Jackmaster has been told, only that I prefer to hear it myself from the original source and IR has thus far refused to answer that question for me). [Although, with Crystal earnings of $400m at 12% yield ($48m) and a dividend of only 11% of $275m ($30.25m) that leaves about $18m for Crystal interest and overhead, of which about $8m is interest ($135m at an estimated 6%), leaving $10m for Crystal overhead.]
        The unanswered question is, how much additional overhead are we paying as those dividends are passed through SLRC (plus the 2% gross asset fee)? It would be shameful if SLRC shareholders had to pay two layers of overhead on the Crystal assets.


    • When you consider dilution effect from the new shares and the loss per quarter of Rug Doctor income, I suspect that Q1 2013 NII will come in below 60 cents. Long term, after resolution of Rug Doctor, and putting their ample liquidity to work, things should be much better. I would look for entry points throughout the course of this year as we look for dividend growth in 2014 and beyond. For me, SLRC is a long term hold. I am content with my yield on basis. It's better than most any company that can be bought today considering risk levels. This is not the best time for bargains in BDC world. But, still, yields above 8% in this environment isn't bad. I think the most important factor right now is risk and size. It is not easy for small BDCs to make headway these days with the yields on their loans and the dividends they have to pay.

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