Details Significant Operational and Prolonged Stock Price Underperformance with No Indication of Improvement
Disappointed with Lack of Meaningful Progress and Urgency to Address Issues Facing the Company Despite Clear Harbor's Repeated Efforts
Believes Liquidation of the Company is the Best Solution in Order to Preserve Stockholder Value
NEW YORK, Oct. 31, 2019 /PRNewswire/ -- Clear Harbor Asset Management, LLC ("Clear Harbor"), a significant stockholder of Garrison Capital Inc. ("Garrison Capital" or the "Company")(GARS), today announced that it has delivered a letter to the Board of Directors (the "Board") of the Company expressing its concerns with the Company's persistent underperformance. Despite considerable effort to work constructively with the Company to address the concerns facing Garrison Capital, the Board has failed to take substantive steps to improve Company performance and refuses to hold management accountable for its repeated failures.
The full text of the letter to the Board follows:
October 31, 2019
Garrison Capital Inc.
1290 Avenue of the Americas, Suite 914
New York, New York 10104
Attention: Board of Directors
Dear Members of the Board of Directors:
Clear Harbor Asset Management, LLC ("Clear Harbor" or "we") is a significant investor in Garrison Capital Inc. ("Garrison" or the "Company"), beneficially owning approximately 1.25% of the Company's outstanding common stock. Clear Harbor is a Registered Investment Advisor managing over $700 million in assets with considerable experience in value investing across the capital structure as well as significant experience investing in Business Development Corporations ("BDCs"). We are writing to you publicly to express our continued dissatisfaction with the Board of Directors' (the "Board") lack of meaningful response and progress in addressing the pressing issues facing the Company, despite our considerable effort to engage privately with the Company.
Over the past year, we have repeatedly expressed our concerns with Garrison's performance in multiple meetings and letters to management. In this dialog, we proposed solutions to close the wide valuation gap between market value and net asset value, which would provide some relief from the stock's severe underperformance. We would like to thank Brian Chase, Garrison's Chief Operating Officer, for taking the time to hear our recommendations and we credit management for taking some initial remedial steps over the past several years. Unfortunately, these actions are too little too late and have failed to adequately address the Company's issues. In fact, the stock continues to suffer new lows.
Most recently, we met with Mr. Chase and Joseph Morea, Garrison's lead independent director. The purpose of this meeting was to alert the Board's independent directors of our concerns. The meeting concluded with assurances from Mr. Morea that investors would receive feedback from the Board's independent directors on an action plan to address the Company's performance issues. We were also told that we would be given the opportunity to present our views to Joseph Tansey, Chief Executive Officer and Chairman of the Board; however, nearly two months have now passed since that meeting, and despite our attempts to follow up on these matters, we have heard nothing.
Since 2015, book value per share has fallen from $13.98 to $10.30. Over the past four quarters alone, book value deteriorated by over $1 per share. Since peaking in 2014, book value per share at Garrison has now declined for twenty consecutive quarters. This abysmal performance is occurring in what is by nearly all measures a historically benign credit environment. If this adverse credit deterioration is occurring deep into an economic expansion, we question how Garrison's portfolio will perform in a recession.
Furthermore, Garrison has not covered its dividend payments from operating income. The failure to cover the dividend is even more notable as the Company increased its leverage from 50% equity/assets in 2015 to only 32% today. We are particularly concerned that the Company chose to ramp up leverage by upsizing a CLO last year, given how late in the cycle the loan asset class is, coupled with increasingly thin spreads and intense competition.
Clearly, the market shares our assessment of the troubled situation at Garrison. In the last 12 months, Garrison stock is down 4% on a total return basis while the index of US Investment Companies is up 11%. Garrison stock currently trades at 65% of net asset value, which is down from 69% at year-end 2017, 75% at year-end 2016 and 87% year-end 2015.
Liquidation is the Best Solution to Preserving Stockholder Value
After five years of failing to earn anywhere near your cost of capital, the market has clearly lost confidence in Garrison, as evidenced by the stock's steep discount to book value. Therefore, the logical path for Garrison at this point is an orderly liquidation. We believe stockholders have suffered enough and deserve to at least recover the difference between the market price of the stock and liquidation value.
We recommend that a new, highly qualified independent investment advisor with liquidation expertise be appointed to oversee this process. As you are of course aware, the investment advisory agreement with Garrison Capital Advisers provides that either a vote of the Company's directors, a vote of a majority of stockholders, or the investment advisor can terminate the agreement on 60 days' notice. As a fiduciary to stockholders, we believe the Board has a responsibility to either vote to terminate the investment advisory agreement or call a special meeting of stockholders and allow stockholders to decide the fate of their Company.
As we previously communicated to management, we are highly skeptical that a strategic transaction for Garrison can provide greater stockholder value than an orderly liquidation. The market has decided that externally managed BDCs present significant conflicts of interest and consequently generally tend to trade below their net asset value. Furthermore, the problems of scale and external management cannot simply be solved by combining two sub-scale externally managed entities. There have been a number of combinations in the BDC investment community over the last couple of years that have not enhanced stockholder value. For example, in August 2019, Crescent Capital BDC, Inc. agreed to acquire Alcentra Capital Corporation ("Alcentra") for a combination of cash and equity. Adjusting for the cash component of the acquisition, Alcentra now trades below 70% of pro-forma combined entity NAV. It is our opinion that transactions of a similar nature are unlikely to recover value for Garrison stockholders. Moreover, stockholders cannot wait for an extended and speculative sale process which might result in no viable bids and places us closer to, if not outright into, a general credit downturn.
There have been a number of transactions over the years involving externally managed entities in which the interests of the external manager and stockholders diverge. We intend to be vigilant in our review of any strategic action undertaken by Garrison to ensure the interests of public stockholders come first.
It has been our long standing practice to work quietly with the management teams and Boards of companies in which we invest. In the past, we have been successful in discreetly working behind the scenes, as it is not our intention to draw attention to ourselves, but rather, to have constructive, impactful relationships with our portfolio companies. However, the situation at Garrison today requires a different action.
We are committed stockholders and it is our priority to work with the Company – not against it – in doing what is best for all stockholders; however, we believe we have exhausted all reasonable attempts to get management and the Board to recognize the need for immediate action. We believe the Board's inaction and unwillingness to hold management and its external manager accountable for the Company's continued poor performance is a clear breach of the Board's fiduciary duties. Based on the Company's frustrating lack of response and meaningful action to date, we are evaluating all options to protect the interests of stockholders.
We are available to discuss the matters raised in this letter at your convenience.
Reserving all rights.
Steven Shaw and Jonathan Shafter
Clear Harbor Asset Management, LLC