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Main St. & Main, Inc. (MAIN) Message Board

rc5717 6 posts  |  Last Activity: Mar 17, 2016 2:34 PM Member since: Nov 11, 2000
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  • Reply to

    how earn so well with such little leverage

    by slarimer2003 Mar 14, 2016 7:29 PM
    rc5717 rc5717 Mar 17, 2016 2:34 PM Flag

    bud,

    The vast majority of BDC's amortize their origination fees, but there are a few that don't. ARCC comes to mind as one that doesn't. Amortizing the origination fee over the life of the loan results in a less volatile (and more predictable) NII quarter over quarter.

    Your pointing out these fees related to exits also affect overall portfolio yield is a good one. Portfolio yield is one of those statistics that BDC's do not report in a uniform manner. They generally just state it in the way that makes them look best. For example, TPVG reported a portfolio yield of 17.9%, but if you go through their investments you're going to be hard pressed to find any with a yield that high. TPVG's stated portfolio yield includes all fees received during the quarter, and that bumps up the portfolio yield. If you back out that 3.5%, their portfolio yield is 14.4%, which is still quite good, and I would argue closer to their true portfolio yield. In addition, some BDC's base this statistic on FV and not cost. I probably like HTGC's method the best, because they state it with all the extra fees received, and also excluding those fees. Just saying you've got to look behind the headline number to get a better feel for what their portfolio yield really is.

    Good talking with you .

    RC

  • Reply to

    how earn so well with such little leverage

    by slarimer2003 Mar 14, 2016 7:29 PM
    rc5717 rc5717 Mar 16, 2016 6:17 PM Flag

    bud,

    Don't know if this is what you are questioning, so if not, excuse my explanation.

    When TPVG (or any BDC) originates a loan, they get an origination fee. The amount can vary, but for the sake of this discussion let's say it's 2% of the loan amount.

    So TPVG originates a loan for $10mm. It has a 4 year term and a 2% origination fee. TPVG will receive the 2% orgination fee ($200K) when the loan is originated, but amortizes this into investment income over the life of the loan (in this example, 4 years). That means $12.5K of that origination fee is reflected in investment income each quarter ($12.5K x 16 quarters = $200K). At the end of the term of the loan, the entire origination fee has been accounted for.

    If the loan is repaid before it matures, any of the remaining origination fee that has not been amortized into investment income is "accelerated" and is reflected into investment income in the quarter the loan was repaid. For example, if the loan is paid off in two years, the remaining $100K that had not been amortized into investment income will be accelerated and reflected in the quarter the loan was repaid. This is explained on P.23 of their last 10-Q

    Also, when a loan is repaid early, there can be a pre-payment penalty fee (also referred to as "call protection") the borrower must pay.

    The amount can vary from loan to loan, but generally, the pre-payment penalty amount is highest during the first year of the loan and declines in subsequent years. There may be no pre-payment fee due in the last year of the loan, it all depends on how the loan is structured.

    Anytime you see a big "beat" on earnings, look to see how high their exits were during the quarter, because that's usually where the extra income came from. Keep in mind fee income from exits is non recurring income, so an especially robust quarter due to elevated fee income from exits, is not to be considered their new "run rate" going forward because when exits normalize, so will NII.

    RC

  • Reply to

    Latest Quarterly Results...

    by blauberry Feb 4, 2016 6:30 PM
    rc5717 rc5717 Feb 9, 2016 11:13 AM Flag

    slcehamrick,

    A couple of things on our modeling analysis.

    As I countered in my response to you, the cost to amend the credit facility is negligible when spread out over the life of the facility. However, what I missed was that PFLT expensed the entire cost in Q4. That was the $0.03 expense that lowered NII from $0.22 down to $0.19, so it's a moot point. There is nothing to amortize. This makes my 2.75% all in interest expense all the more conservative.

    Another thing I forgot to include in my analysis was the full effect of the $72mm in net portfolio growth in Q4. We don't know at what point during the quarter each of those loans was originated. If they were all originated on October 1st we've already seen the earnings power they bring to NII. If they were all originated on December 31st we've seen none of the earnings power they bring to NII. What I do is " estimate" right in the middle. I suggest we've probably seen half the earnings power of the investments they originated in Q4. In Q116 we'll get the full benefit of those investments which should add a bit over $0.01 more to NII per quarter.

    So in Q116 we won't have that $0.03 expense to amend the facility, plus their existing portfolio as of December 31st should contribute an add'l $0.01 toward NII. That gets us to $0.23 to start, plus whatever progres they make growing the portfolio in Q1.

    My original analysis (not posted here) was that once fully leveraged (about .8:1) NII was likely to be about $1.18. My analysis in our posts was only getting me to $1.14. What I forgot was that $0.01 per quarter from a full quarters worth of income from Q4's net portfolio growth.

    Read the Barrons article on FSC/FSAM. Agree with it 100%.

    I'm generally not drawn to these Floating Rate BDC's but found PFLT's situation compelling because they had been so well run, and because of the merger have so much cash to invest in an improving market for lenders. Nothing bad to say about SUN's but they're already at .75:1.

    Sentiment: Buy

  • Reply to

    Latest Quarterly Results...

    by blauberry Feb 4, 2016 6:30 PM
    rc5717 rc5717 Feb 9, 2016 10:35 AM Flag

    bud,

    You're right the credit facility is priced at L+200 bps, but that's just the headline number. What slcehamrick was including is the cost to amend & enlarge the facility, which normally gets amortized over the life of the facility (5 years). However,PFLT expensed the entire amount in Q415. It was that $0.03 per share one time expense (about $800K). I missed that also in my estimate, which only makes my 2.75% interest expense cost all that more conservative. There is also a fee for any unused portion of the facility. I think it's 35 bps. But PFLT is going to use most of this facility so this fee will be negligible.

    You can be sure PFLT is going to increase leverage to around .8:1 give or take. They need to increase leverage to get NII back up covering the dividend. This level of leverage should not a problem with a portfolio like PFLT's for a couple of reasons.

    1.) Their portfolio is almost all individual first lien loans. Sure, BDC's NAV's are lower this quarter, but first lien loans are the least vulnerable to declines in fair value marks. Second lien is more vulnerable, sub debt even more, and things like CLO equity & equity the most vulnerable. Barring actual credit problems, PFLT's portfolio is not not likely to experience much in terms of declining fair value marks.

    2.) All BDC's are required to assign fair value marks to their assets (loans) each quarter. BDC's also have the option of using fair market accounting to their liabilities (credit facility etc). Once a BDC has chosen their option it is non-revocable. Very few BDC's use the option to mark to market their liabilities. For the life of me, I don't know why. PFLT has opted to mark their liabilities to market each quarter. This means when loan values drop due to market conditions (not credit problems), their assets & liabilities somewhat move in tandem which results in their debt to equity ratio being more stable during tumultuous times.

    Sentiment: Buy

  • Reply to

    Latest Quarterly Results...

    by blauberry Feb 4, 2016 6:30 PM
    rc5717 rc5717 Feb 8, 2016 12:47 PM Flag

    My modeling has a couple of minor differences, and they come to a more favorable outcome.

    First, I'd say 3% is too high for the credit facility expense. I was looking for a conservative all in cost also but only used 2.75%. Why? Actual costs were only L+243% in Q4. That excludes the unused fee & amendment cost but over the 5 year life of the facility the amendment cost is negligible and the unused fee will be too because they are going to use most of the facility.

    Base management fee is 1%.

    Your 1% for incentive fee & other costs is pretty pretty much in line with my estimate.

    I'm up to 4.75% costs at this point (2.75% C/F, 1% BMF, 1% Incentive fee & misc)

    I used an 8.2% weighted average yield of new loans going forward vs your 8%. Why? Because conditions have been improving for lenders. PFLT's new loans in Q4 averaged an 8.4% coupon. This caused the overall weighted average yield of their portfolio to increase from 7.9% to 8.2% QoQ. Going forward I think new loans will average at least 8.4% maybe a little more, but I want a conservative estimate so I used 8.2%.

    8.2% minus 4.75% gets me to a 3.45% spread. Assuming an.8:1 leverage ratio, which would be $200mm more in new loans, I'm at NII of $1.14.

    I know, I haven't accounted for non accruals yet. Your 1% estimate would lower NII by less than $0.02. I agree it's unrealistic to assume no non accruals.

    Potential upside to my estimate? New loans average more than 8.2% (I think this is highly likely), they operate higher than .8:1 leverage (likely), they enter into a Senior Loan joint venture with someone (would be a wise move IMO).

    I suppose it's possible they could exceed expectations on the non accrual front but it would be unrealistic to expect that.

    I believe my estimate is conservative and I think there's a good possibility actual numbers in future quarters will exceed my estimate.

    That's my story and I'm sticking to it.

    RC

    Sentiment: Buy

  • Reply to

    Latest Quarterly Results...

    by blauberry Feb 4, 2016 6:30 PM
    rc5717 rc5717 Feb 6, 2016 7:47 PM Flag

    slcehamrick,

    How are you determining a net spread of 2% on the additional leverage?

    RC

    Sentiment: Buy

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