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Alcentra (ABDC) Cuts Dividend As Competition Intensifies

By Lisa Thompson


For the third quarter of 2017, the company (NASDAQ:ABDC) reported total investment income of $7.6 million versus $9.1 million last year, a decline of 17%. Adjusted and net investment income was $4.8 million, or $0.34 per share versus $4.8 million and $0.35 per share last year. 

Alcentra is suffering from increased competition in the lending market that is pushing down rates. It also has a number of investments that have gone sour. These investments have been written down to where there should be upside in the future. This quarter it cut its dividend from $0.34 per quarter to a more sustainable $0.25, and the stock price has reset to reflect that. The price may however have declined further than it should give the portfolio and its prospects. The company has a valuation at its peers, and a best-in-class management fee structure for investors. We believe that ABDC is worth $9.60 per share and at a 13.8% yield, trades at a rate well above the average yield of its competitors. 

Q3 2017 Results 

During the three months ended September 30, 2017, Alcentra realized a loss on investments of $10.4 million and a decrease in unrealized assets of $1.3 million.  

Net asset value (NAV) was $175 million, or $12.27 per share as of September 30, 2017 versus $13.72 per share, on December 31, 2016. During Q3 the company received proceeds from repayments and amortizations on investments of $3.9 million and invested $28.1 million, including investments in three add-on investments and one refinancing. 

Add-on investments during the quarter included the following: 
• Carlton Group- $9.8 million in 8.0% 1st lien – tranche A notes and $13.4 million in 12.5% 1st lien – tranche B notes 
• Lugano - $2.0 million additional investment in 1st lien notes

• Black Diamond Rentals - $1.0 million additional investment in tranche C super senior notes

• My Alarm Center, LLC - $1.9 million additional investment in preferred equity 


Investments that have already occurred in Q4 2017: 
• On October 5, 2017, Alcentra paid a dividend to shareholders of record as of September 30, 2017 of $0.34 per share.
• On October 19, 2017, Alcentra invested $19.3 million in Cirrus Medical Staffing, Inc. (L + 8.25% First Lien debt)

• On November 2, 2017, the Company's Board of Directors declared a regular quarterly dividend of $0.25 per share for the fourth quarter of 2017, which is payable on January 4, 2018 to stockholders of record as of December 29, 2017.
• On November 3, 2017, Nation Safe Drivers repaid their investment in the amount of $11.7 million 

Alcentra Capital is a business development company (BDC) with a disciplined portfolio approach and the benefit of an affiliation with BNY Mellon, its single largest shareholder. The company’s $282 million portfolio is invested in 30 companies, with 91% in debt and 9% in equity. The company targets the lower middle-market, which has been under-served by traditional lenders.To mitigate its risk, the company conducts substantial due diligence, seeks rigorous financial covenants and diversifies its investments across a broad range of sectors and portfolio companies. Its largest sector, healthcare services, is now 19% of the total investment portfolio. The weighted average yield on the company’s debt portfolio is 11.5% and the weighted average portfolio company leverage is 3.59 times EBITDA. Three companies in the portfolio are now non-performing: GST AutoLeather, Media Storm, and Show Media. The investment in My Alarm Center was converted to equity resulting in a realized loss of $10.4 million. Four others are on the watch list. At $7.27, the shares trade at a 41% discount to the company’s $12.27 NAV (net asset value) per share. NAV has declined from the $14.63 per share at the time of its May 2014 IPO.


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