In the past, other BDCs that had a restriction on selling below NAV ended up in a situation where they were cash-strapped (BDCs are required by law to distribute 90% of their income), since available cash had to be paid out. In response, some BDCs (I believe ACAS is one--though they have since given up BDC status) have adopted provisions like this one to give them more flexibility in the case that case needs to be raised.
I don't think it is a situation that any BDC wants to be in, but what if all (or substantially all) available cash has been paid out (as required by law) and a promising opportunity comes up in the midst of a market meltdown where the price is below NAV not due to any fault of the company but just due to overall market forces? By the time you wait for the price to recover, the opportunity may be gone.
I don't think that there is a nefarious plan to go out of their way to sell stock below NAV; I think it is more of a contingency plan for an extreme situation. Still, such an argument may not be compelling, and there are good reasons for such a restriction under most circumstances.
That's a good summary from the prospectus [page 21, but actually page 26 of the PDF for me]. Here is the summary from the document:
The Board of Directors believes that having the flexibility to issue our common stock below NAV per share in certain instances is in the best interests of stockholders. If we were unable to access the capital markets as attractive investment opportunities arise, our ability to grow over time and continue to pay steady or increasing dividends to stockholders could be adversely affected. It could also have the effect of forcing us to sell assets that we would not otherwise sell, and such sales could occur at times that are disadvantageous to sell. We could also expend considerable time and resources on a capital raise advantageous for stockholders, but be forced to abandon it solely due to stock market activity causing our stock price to dip momentarily below our NAV per share. Even if we are able to access the capital markets, there is no guarantee that we will grow over time and continue to pay steady or increasing dividends. In addition, the Board of Directors believes that the Company's sales of common stock at less than NAV per share during 2009, 2010, 2011 and 2012 provided the Company with capital strength and flexibility and contributed to the strengthening of the Company's stock price. The Board of Directors believes that sales of common stock at less than NAV per share in the future could have either a positive or negative effect on the Company's stock price depending on a variety of factors, including the Company's use of the proceeds of such sales.
I voted no. Here are my reasons. What I am concerned about is every time they have done the new issue they have done it at a discount to the market price. This has always resulted in the substantial drop in the market price after the new issue and the increase in the revenue has been used to pay dividends for the new share holders and the existing share holders have not seen any increase in the dividend rate.
It seems the management is doing it to grow their management fees which is based on % of asset under management. So they keep growing the AUM to increase their payout, but that is not helping the shareholders in terms of the dividend growthat all. In fact, last year the earnings/share were well over $1.60 but the share holders were paid just about inthe neighborhood of $1.32 as the they used the additional earning to pay to the newly issues shares. It takes them time to deploy the additional Capital and they not necessarily getting higher rates, so how do you justify it?
I don't mind if the Newly issues shares are priced at the close of the business day market price, if deemed necessary. At least, be fair to the existing share holders.